PROBLEMS  IN 
BUSINESS  FINANCE 


EDMOND  EARLE  LINCOLN,  M.  A.  {Oxon.)  Ph.  D. 

ASSiaTANT    PROFE8SOB    OP   FINANCE, 

HARVARD    USIVEBSITT    GRADUATE   SCHOOf.   OF 

B08n*E88   administration; 

AUTHOR    OF 

"IH*   BBBDUTB    OF    MUWICIPAL   ELECTRIC    LIGHTING    IN 

MAMACHC8F.TTS,"    "CBNTRAL    ELECTRIC    LIGHT    AND   POWER 

9TAT10HI8,    1917,"    etc. 


A.  W.  SHAW  COMPANY 

NEW  YORK  CHICAGO 


LONDON 


COPYRIGHT  1921 


A.  W.  SHAW  COMPANY 


PRINTED    IN    THE    UNITEn    STATKB    OF    AMERICA 


4G6556 


To 

the  Students  of  the  Harvard  University  Gradu- 
ate School  of  Business  Administration  Whose 
Critical  Interest  and  Appreciation  Have  Led 
to  the  Writing  of  This  Book  for  Them, 
and  to 
the  Many  Business  Men  and  Bankers  of  Boston, 
New    York,   and  Elsewhere,   without   Whose 
Generous  Cooperation  This  Book  Could  Not 
Have  Been  Written. 


PROBLEMS 
IN  BUSINESS  FINANCE 

iBMniiiiiniBiiiioBia^^^^^ 

NOTE  OF  ERRATA  | 

PROBLEM    8,    page    51;    problem    108.    page    259;  | 

problem    117,    page    273;    problem    131,   page   303;  ( 

problem    156,   page    330  and   problem     193,    page    3S0,  J 

should  carry  quotation  marks.     '  B 

On  page  xli  of  the  bibliography,  topic  vi.  "Financial  B 

Aspects  of  Purchasing  Goods,"  should  read:  "Financial  J 

Aspects  of  Producing  Goods."  | 

The  right-hand  running  head  on  page  67  should  read:  | 

"Changes  in  Ownership."  | 

The  right-hand   running   head  on    page   229   should  ■ 

read:  "Borrowing  from  the  Banks."  J 

The  right-hand  running  head  on  pages  313  and  315  ■ 

should  read:  "The  Economies  of  Size."  ■ 

The  second  line  in  paragraph  four,  page  191,  problem  J 

59,  should  read:  "The  remaining  one-third  of  the  Indus-  J 

trial  Partnership  stock  is  non-voting,"  etc.  H 

Between  paragraphs  nine  and  ten,  page  47,   the  line  s 

"PRICE  PER  UNIT  $235"  should  be  inserted.  | 

Paragraph  five,  page  48,  should  read:  "With  a  capita  H 

of  $1,250,000,"  etc.  | 

The  last  line  of  the  first  paragraph  on  page  53  should  J 

read:  "The  results  of  this  lack  of  balance  are  as  a  rule  m 

highly  disastrous."  ■ 

StsiiHiiiiHDiaiiiiiiiiiiiiiiiiiiiwniiiiia^^^^ 


PREFACE 

IN  preparing  this  book  of  Problems  in  Business 
Finance  the  purposes  are  many.  First,  the 
author  wishes  to  provide  in  readily  usable  form 
problems  in  finance  to  be  used  by  his  own  large 
classes  in  Harvard  University,  which  are  conducted 
solely  by  the  "case"  method  of  instruction.  Secondly, 
the  aim  is  to  present  primarily  those  problems,  too 
frequently  ignored,  of  the  small  and  medium-sized  busi- 
ness concerns  of  various  sorts.  Further,  the  financial 
problems  which  are  common  to  all  kinds  of  business 
units,  large  or  small,  are  also  developed.  The  nor- 
mal, day-to-day,  intimate  problems  have  been  stressed, 
rather  than  those  of  a  spectacular  and  public  sort. 
Finally,  the  constant  purpose  has  been  to  show  the 
interrelation  of  financial  operations  in  business,  the 
effects  of  general  business  policies  on  the  financial  pro- 
gram, and  the  desired  coordination  of  a  concern's 
activities  through  central  financial  control — all  in  rela- 
tion to  the  Business  Cycle. 

The  problems  are  real  ones,  drawn  directly  by  the 
author  from  the  financial  experiences  of  a  large  number 
of  business  men  and  bankers.  More  than  125  totally 
different  kinds  of  business  and  industry  are  represented, 
and  hundreds  of  separate  concerns.  Many  of  these 
instances  have  come  under  the  writer's  personal  obser- 
vation. Only  a  small  proportion  have  been  publicly 
known,  and,  in  using  such  cases,  the  writer  has  usually 
managed  to  secure  additional  first-hand  information  of 
an  illuminating  sort. 

On  account  of  the  confidential  nature  of  most  of  the 
material  presented,  it  has  usually  been  necessary  to  dis- 
guise or  delete  names  or  places,  and  occasionally  to 
change  incidents  and  the  character  of  the  business. 
Actual  names  have  been  used  sparingly,  and  then  only 


ii  PREFACIO 

when  the  facts  have  been  pubhshed  by  the  general 
financial  press.  On  rare  occasions,  also,  the  author 
has  combined  two  problems  in  order  to  make  a  better 
case  for  discussion.  In  no  instance,  however,  has  the 
force  of  the  original  situation  been  lost. 

For  pedagogical  reasons,  an  effort  has  been  made  to 
include  in  most  of  the  problems  used  a  sufficient  amount 
of  first-hand  data  to  enable  the  reader  to  reason  out 
the  logical  conclusion.  Very  frequently,  also,  actual 
solutions  have  been  given  with  a  view  to  eliciting  criti- 
cal comment.  In  pursuance  of  this  polic}',  therefore, 
much  material  bearing  on  the  internal  financial  con- 
duct of  business  concerns  has  been  collected,  which  is 
probably  not  elsewhere  available  in  printed  form.  The 
Appendix  contains  some  significant  statistical  data, 
a  large  part  of  which  is  now  published  for  the  first 
time  and  much  of  which  is  not  readily  accessible.  These 
facte  should  make  the  book  of  more  use  and  interest 
to  the  general  reader  as  well  as  to  the  student. 

Since  the  problem  method  of  teaching  business  sub- 
jects is  still  in  its  infancy,  it  is  no  simple  task  to  secure 
financial  data  which  will  effectively  serve  the  purpose 
of  the  instructor.  Time  is  required  for  the  "ripening" 
process.  The  present  book  of  problems  has  been  put 
together  with  a  good  deal  of  haste,  primarily  for  the 
benefit  of  the  author's  own  students.  He  is,  accordingly, 
conscious  of  many  shortcomings  in  the  work,  some  of 
which  may  be  remedied  in  future  editions  if  the  public 
calls  for  them.  Hence,  suggestions  and  criticisms  of 
every  sort,  from  any  source,  will  be  doubly  welcome. 

The  author's  indebtedness  to  others  is  greater  than 
he  can  ever  repay.  His  thanks  are  primarilj"  due  to 
the  large  number  of  business  men  and  bankers  in  many 
places  who  have  so  generously  supplied  him  with  first- 
hand material  and  whose  interest  in  the  problem  method 
of  teaching  Business  Finance  has  been  unflagging.  He 
hopes  that  they  may  at  some  time  be  in  a  small  measure 
compensated  for  their  pains  by  the  better  trained 
young  men  who  go  out  from  the  schools  to  enter  their 
service. 


PREFACE  iii 

Mention  should  also  be  made  of  the  constant  interest 
taken  in  this  work  by  Dean  Wallace  B.  Donham,  to 
whom  is  largely  due  the  introduction  of  the  "case" 
method  of  instruction  in  the  Harvard  Business  School. 
Finally,  the  faithful  services  of  his  secretary,  Miss 
Margaret  A.  Randall,  should  not  go  unnoted  by  the 
author. 

E.  E.  L. 

Cambridge,  August  8,  1921. 


TABLE  OF  CONTENTS 

OUTLINE xxvii 

BIBLIOGRAPHY xxxv 

General    Books    on    Business    and    Corporation 

Finance,    etc xxxvi 

General    Problems    of    Organization — Legal    As- 
pects, etc xxxviii 

The  Problem  of  Raising  Fixed  Capital xxxviii 

The  Problem  of  Securing  Working  Capital xxxix 

Financial  Aspects  of  Purchasing  Goods xl 

Financial  Aspects  of  Producing  Goods xli 

Financial  Aspects  of  Selling  Goods xli 

Administration  of  Income  and  Financial  Control .  xliii 
Financial  Standard  and  the  Financial  Economies 

of  Size xliii 

Financial  Involvements,    Adjustments,   Receiver- 
ships, Bankruptcies,  Reorganizations,  etc xlvi 

The  Relation  of  Legislation  to  Industrial  F'inance .  xlvii 

Suggestions  Regarding  Current  Material xlviii 

Financial  Periodicals xlviii 

Periodicals  with  Useful  Articles xlix 

Financial  and  Business  Dailies xlix 

Manuals,  Statistical  Services,  and  Miscellaneoiis  xlix 

PART  1— INTHODICTOUY 

NOTE    TO    TEACHERS,    STUDENTS.    AND    THE 

GENERAL  READER  3 


vi  PROBLEMS  IX  BL'SINESS  FINANCE 

CHAPTER  I 

INTRODIC TION  AND  GENERAL  SURVEY 
OF  THE  FIELD 

Scope  and  Limitations  of  the  Subject 7 

Industrial  Finance  vs.  Public  Utility  Finance 10 

Financial  Differences  Between  Industiies 12 

Promoting  the  Enterprise 13 

Original  Investment 14 

Financing  the  Development 15 

"Growing  Pains" 17 

Raising  Working  Capital 18 

The  Business  and  the  Bank 19 

The  Commercial  Paper  Market 20 

The  Use  of  Trade  Acceptances 21 

Purchasing  and  Finance 22 

Production  and  Finance 23 

Selling  and  Finance '. 24 

Administration  of  Earnings 26 

Financial  Failures 27 

CHAPTER  II 

FINANCIAL  AND  GENERAL  CONSIDERATIONS 
INVOLVED  IN  BEGINNING  A  BUSINESS 

1.  General  Problem  in  the  Launching  or  Various  Types 
of  Businesses.  {Rubber  Tire,  Shoe,  Confectionery, 
Chemical) 30 

2.  Shall  a  Chain  of  Toy  Shops  l)e  Financed'? 33 

3.  Shall  a  Company  for  Exploiting  a  New  Mechanical 
Device  be  Launched? 37 

4.  Harnessing  the  Tides! 41 

5.  Launching  a  Fire  Insurance  Company  in  1921 ....    45 

0.  An  Attempt  at  Financing  a  Commercial  Paper 
House 46 

7,     Launching  a  Small  Investment  Company  in  1921  . .   50 


CONTENTS  vii 

PART  II— SOURCES  OF  CAPITAL 

CHAPTER  III 
THE  PROBLEMS  OF  RAISING  FIXED  CAPITAL 

Exercise  I.     How  Much  Capital  is  Needed? 54 

A.     GENERAL  METHODS  OF  RAISING  FIXED  CAPITAL 

8.  General   Problem   in    Raising  Fixed   Capital  for   a 
Small  Business 54 

9.  Dealer  Help  in  Financing  Fixed  Capital 56 

10.  Two  Simple  Methods  of  Financing  a  New  Pottery.  .   57 

11.  Financing  a  Small  Rubber  Tire  Factory 58 

12.  Public  Financing  of  a  Hotel 59 

B.    VALUATION  OF  INTANGIBLES 

^1.3.     Valuation  of  Patents  and  Other  Intangibles  in  an 

Old  Concern.     (Machine  Accessories) 61 

14.  Valuation  of  Patents  in  a  New  Concern.     {Ice  Man- 
it  fact  it  ring)  62 

,/'   ' 

15.  General    Pi-oblem   on    Capitalization   of    Goodwill. 
^- — ^    (Rubber,  Chain  Stores,  Tobacco  and  Cigarette,  Collar 

Companies) • 64 

C.    FINANCING  CHANGES  IN  OWNERSHIP.  ETC. 

16.  Financing  a  Change  of  Ownership  in  a  Closely  Held 
Concern 65 

17.  Financing  a  Complete  Change  of  Ownership  Which 
Will  Make  Possible  a  Continuance  of  the  Policies 

of  the  Former  Ownei's 67 

18.  Refinancing  to  Effect  a  Change  in  Organization  ...   68 

D.     FINANCING  THE  EXPANSION  OR  DEVELOPMENT 

19.  Financing    the    Growth    Solely    Out    of    Earnings. 
(Maker  of  Jewelrn  Cases) 70 


viii  PROBLEMS  IN  BUSINESS  FINANCE 

20.  Ford's  Method  of  Financing  Expansion  and  Se- 
curing New  Capital 72 

21.  Raising  Fi.xed  Capital  Through  a  Novel  Preferred 
Stock  Issue.     {Electric  Poiver  Company) 75 

22.  Prospectus  Covering  the  Flotation  of  a  Small  Bond 
Issue.     {Fibreboard  Company) 77 

23.  Banker  Control 82 

24.  Getting  New  Capital  for  an  Old,  Closely  Owned 
Concern.    {Enamelwnre) 83 

25.  Securing  More  Capital  for  a  New  Concern.  {Gum 
Tape  Company) 87 

26.  (jeneral  Problem  in  the  Financirg  of  a  Company 
Making  Patent  Caps  and  Jar  Covers 90 

27.  An  Expansion  which  Necessitates  a  Change  in  Or- 
ganization.    {Paper  and  Pulp  Mill) 94 

28.  Financing  an  Expansion  which  Necessitates  a 
Change  in  the  Nature  of  the  Business.  {Cardboard 
Packing  Cases) 99 

29.  Shall  a  Small  Concern  Expand  Quickly  During  a 
Period  of  Rising  Prices 103 

30.  Expanding  a  Garment  Manufacturing  Concern  to 
Take  Ovei-  a  Textile  Mill  in  1919    .  . 1C4 

31.  Financing  the  Expansion  of  a  Conservative  Paper 
Company  in  the  Post-War  Period 105 

32.  Shall  a  Concern  Own  Real  Estate  or  Pay  Rent? 
{Candy  Manufacturer) 108 

33.  How  Fast  is  it  Safe  for  a  Business  to  Grow? 
{Standard  Parts  Company) Ill 

34.  Financing  the  Expansion  and  the  Contraction  .  .        114 


E.     FINANCING  MORE  OR  LESS 
DOUBTFUL  UNDERTAKINGS 

35.  Floating  a  New  Automobile  Company  in  1920  ....    116 

36.  Financing  a  Fruit  Company  in  an  Unusual  Manner  117 

37.  Financing  an  Automobile  Finance  Corporation  ...    118 


CONTENTS  ix 

38.  Public    Financing   of  a   New   "Private"  Banking 
House 122 

39.  Financing  a  Mortgage  Company 128 

40.  Financing  a  Fisheries  Conipanv  During  the  War 
Period ." 135 

41.  Financing  a  New  Theatre  in  1921   139 

42.  Problem  in  Securing  Capital  to  Develop  an  Old 
Gold  Mine  142 

43.  The  Financial  Methods  of  a  Small  Oil  Company  .  145 

44.  Advertising   for  Capital.     {Thirty-Seven  Different 
Cases) 152 


F.     RAISING  WORKING  CAPITAL  BY  THE  METHODS  COM- 
MONLY USED  TO  OBTAIN  FIXED  CAPITAL 

45.  Selling  Stock  by  the  Company.    (Rubber  Shoe  Com- 

'  _    pany) 157 

46.  Raising  Working  Capital  for  a  Small  Rubber  Tire 
Company  Through  a  Preferred  Stock  Issue  at  the 
Endof  1919 159 

47.  General  Problem  in  Alternative  Methods  of  Rais- 
^       ing   New    Working  Capital  for  an   Old   Concern, 

Through  Public  Security  Issues 161 


CHAPTER  IV 

THE  PROBLEMS  OF  RAISING  FIXED  CAPITAL 

(Continued)— CV^TOMER  OWNERSHIP  AND 

EMPLOYEE  OWNERSHIP 

A.    CUSTOMER  OWNERSHIP 

48.  Financing  a  Large   Electric   Light   Company   V)y 
Selling  Stock  to  Customers 166 

49.  Financing  a  Small  Light  and  Power  Company  by 
Selling  Preferred  Stock  to  Customers 167 

50.  Financing  the  Expansion   of  a  Small   Telephone 
Company  Solely  by  the  Sale  of  Corrn  on  Stock  to 

the  Users  of  the  Service 167 


X  PROBLKMS  IN  BISIXESS  FINANCE 

01.  Financing;  the  Ex|)ansion  of  a  Small  Powei-  Coni- 
pany  by  Means  of  Prefpired  Stock  Issius  Sold  to 
Customers 168 

02.  Tlio  Method  by  Which  the  United  Drug;  Conipan>- 
Originally  Secured  the  Inteiest  of  Ret  nil  Druggists  170 

53.  Extending  the  Customer  Ownership  in  the  United 
Drug  Company 171 

54.  Ciiving  Preferred  Stock  as  a  Bonus  to  the  Cus- 
tomei .     {Confectionery  Company) 177 

55.  A  Novel  Method  of  Selling  Stock  to  the  Cu.s- 
tomer.     (Gasoline  Filling  Stations) 179 

56.  Getting  New  Capital  for  an  Automobile  Concern 

l)y  Selling  Stock  to  the  Customers  in  1920 180 

57.  A  Drive  for  Customer  Ownership  in  a  Chain  of 
Lunchrooms.     (Waldorf  Company) 182 


B.     EMPLOYEE  OWNERSHIP 

58.  Some  Typical  Methods  of  Promoting  Employee 
Ownership.  (U.  S.  Steel,  General  Electric,  Eastman 
Kodak,  Montana  Power,  Midvde  Steel,  a  Rubber 
Company,  Standard  Oil  of  X .  J 185 

59.  Employee  Owneiship  in  Two  Old  and  Highly  Suc- 
cessful Manufacturrg  Concerns.  {Dennison  and 
Studebaker)   190 

60.  Employee  Ownership  of  Preferred  Stock  in  a  Paper 
and  Pulp  Mill 195 

61.  Selling  Common  Stock  to  Emploj^ees  During  a 
Period  of  Depression  in  Order  to  Seciu'e  Working 
Capital.     (Rubber  Company) 197 

62.  Employee  Ownership  Resulting  in  Speculation  .  . .    198 


C.    COOPERATIVE  OWNERSHIP 

63.  Financing  a   New   Packing  Company  by  Selling 
Stock  to  Stock  Raisers ". ...   201 

64.  Financing  the  Construction  of  Buildings  by  Selling 
Stock  to  Members  of  the  Building  Trades  Unions.    202 


H^f 


CONTENTS  xi 

(H AFTER  V 

THE  PROBLEMS  OF  RAISIX(; 
WORKING  CAPITAL 

■'^Exercise  II.     Problem    In    Working   Capital,    Financial 
^^■^      Standards,  etc ' 20G 

A.     BORROWING   FROM  THE  BANK 

65.     What  is  Meant  hy  Rank  "Loyalty"? 207 

(36.     Tlie  (liaractei-  of  a  Bank's  Officials 208 

67.  What    Should    the    Business    Man    Know    About 
His  Bank'.' 209 

68.  Securing  Credit  Information  from  a  Bank 210 

69.  The  "Industrial  Service"  of  the  Bank 211 

70.  Lending  to  a  Concern  Without  a  Statement  of  Con- 
dition. (Woolen  Manufacturer  a nd  Department  Store)   212 

71.  The  Relative  Importance  of  Character,  Capacity, 

"^         and  the  Financial  Statement 214 

72.  The   Desiral:)ilitv  of  Giving  Full   Information    to 

the  Bank * 215 

73.  To  What  Extent,  if  at  All,  Should  a  Bank  Lend 

on  "Fixed"  Assets? 215 

74.  The  "Two  to  One"  Ratio 217 

75.  The  Analysis  of  the  Current  Ratio 217 

"76.     Exercise  in  Statement  Analysis 218 

77.     Looking  Beyond  the  Balance  Sheet 222 

i  78/    The  Twent}^  Per  Cent  Deposit  Requirement 223 

79.  Need  for  Maintaining  the  Required  Bank  Balances. 
(Shoe  Manufacturer) 224 

80.  Should  a  Borrowing  Concern  Pay  Off  All  of  Its 
Bank  Loans  at  Least  Once  Each  Year? 226 

81.  How  Extensively  Should  a  Business  Borrow?  227 

82.  How  Much  Business  Can  a  Concern  Afford  to  Do 

on  Credif 227 

83.  Bank  Loans  and  Government  Regulation 228 


xii  PROBLEMS  IN  BUSINESS  FINANCE 

B.    OPEN  MARKET  BORROWINGS 

84.  A  Small  Company  Borrowing  on  the  Open  Market. 
{Garment  maker) 230 

85.  Is  the  "Quality"  of  Commercial  Paper  Related  to 
the  Nature  of  the  Industry  Engaged  in  by  the 
Borrowing  Concern? 231 

86.  The  Commercial  Paper  Market  and  the  Business 
Cycle 232 

87.  General  Questions  on  the  Use  of  Commercial  Paper  232 

88.  What  a  Supposedly  Strong  Concern  Can  Do  by 
Borrowing  Through  Note  Brokers.  (Claflin  Com- 
pany)     233 

89.  How  a  Small  Concern  Borrowing  Solely  on  the 
Open  Market  Deceived  Its  Creditors 23o 

90.  What  Steps  Shall  be  Taken  When  the  Commer- 
cial Paper  Market  is  No  Longer  Open?  (Woolen 
Company) 236 

91.  Attempting  to  Renew  Relations  with  a  Former 
Note  Broker  in  1921.  {Hardware  Manufacturing 
Company 237 

92.  Seeking  a  New  Note  Broker  in  1921.  {Maker  of 
Small  Wares) ".239 

\9Z.     Should  a  Concern  Finance  Itself  Largely  Through 
'^     Note  Brokers?     (Shoe  Exporter) 241 

94.  Conflict  of  Interests  Between  Open  Market  Bor- 
rowing and  Bank  Borrowing.  {Maker  of  Low 
Grade  Watches) 242 

95.  The  Nature  of  the  Business,  the  Business  Cycle 
and  the  Note  Broker.  {Masons^  Supplies  Com- 
pany)    244 

C.    THE  USE  OF  THE  TRADE  ACCEPTANCE 

96.  Claims  Made  for  the  Trade  Acceptance  by  One 

of  Its  Chief  Advocates 245 

97.  What  do  Figures  Prove?  (Large  Electrical  Sup- 
ply Company) 246 

98.  Trade  Acceptances  and  the  Rapid  Increase  of 
Prices.     (Iron,  Coal,  and  Coke  Company) 248 


CONTENTS  xiii 

99.     Intioducing   the  Use  of  the  Trade  Acceptance 

with  Concessions.     (Shoe  Company) 249 

100.  Using  the  Trade  Acceptance  as  an  Aid  to  Sell- 
ing.    (Wholesale  Cloth  Merchant). .  , 250 

101.  Can  the  Open  Account  Prove  More  Satisfactory 
Than  the  Trade  Acceptance?  (Small  Dealer  in 
Electrical  Supplies) 252 

102.  Under  What  Circumstances  Shall  the  Trade 
Acceptance  be  Adopted?     (Wholesale  Grocenj).  .  .   253 

103.  The  Banker's  Point  of  View  on  the  Trade  Ac- 
ceptance     254 

104.  Conflicting  Opinions  of  Bankers  on  Trade  Accep- 
tances     255 

105.  Trade  Acceptances  and  the  Turnover  of  Inventory  256 

106.  General  Questions  on  the  Trade  Acceptance  ....  256 

D.     MISCELLANEOUS  METHODS  OF  RAISING 
WORKING  CAPITAL 

107.  Conservatism  in  Securing  Working  Capital. 
(Large  Manufacturer  of  Novelties) 257 

108.  Getting  Credit  from  the  Supply  House.     (Retail 
,^\    Dry  Goods) .' 259 

109.  Business     Borrowing    on     Personal     Collateral. 

(Machine  Accessory  Company) 261 

110.  Pledging  Receivables.  (Dealer  in  Automobile 
Supplies) 26'. 

111.  Raising  Working  Capital  Through  the  Issue  of 
Notes  Secured  by  Inventory.  (Copper  Export 
Association) 264 

112.  A  Distress  Method  or  R'^ising  Working  Capital. 
(Candy  Manufacturer) 266 

113.  How  Can  a  Successful  Woolen  Firm  Improve  Its 
Credit  Position  in  1921? 267 

114.  Recently  Developed  Methods  of  Securing  Work- 
ing Capital 268 


xiv  i'ROHLEMS  IN  BUSINESS  FINANCE 

115.  Shall  a  Concern  Whose  Finaneial  Standing  Has 
Been  Excellent  Sell  New  Securities  at  a  High 
Rate  in  Order  to  Improve  Its  Current  Position? 
{Steel  Products  Cotnpaitii) 270 

116.  The  Cumulation  of  Credit  Operations  in  the 
Automobile  Industry 272 

117.  Paying  off  Unsecured  Creditors  with  New  Securi- 
ty Issues 273 

118.  The  Inter-Relation  of  Credit  Operations  in  the 
Different  Stages  of  an  Industry.     (Fabric  Mill)  .    21 A 

119.  Current  Financing  and  the  Business  Cycle 276 


PART  III 
PROBLEMS  OF  INTERNAL  FINANCING 

CHAPTER  VI 
FINANCIAL  ASPECTS  OF  PURCHASING  GOODS 

120.  General    Problem    in    Purchasing    and     Credit. 

.^         {J.  C.  Penney) 282 

121.  Buying  from  Hand  to  Mouth.  (r;/oce/-(/*Store).  ..  .    284 

122.  Relation  Between  the  Purchasing  Policy,  the 
Turnover,  and  Profits.     (Hosiery) 285 

123.  The  Results  of  "Overbuying"  in  a  Retail  Store. 
(Men's  Clothing) 286 

124.  The  Goodyear  Company's  Purchasing  Pohc3^.  .. .   289 

125.  The  Possible  Results  of  Accepting  One's  Com- 
mitments When  Others  are  Canceling.  (Cotton 
Cloth  Mill) 291 

126.  Hedging  Operations.     (Cotton  mid  Flour  Milling)  292 

127.  Speculating  for  a  Rise  in  Price.  (Steel  and  Paper 
Products  Companies) 294 

128.  Shall  a  Concern  Whose  Resources  are  Low  Pur- 
chase Heavily  in  Order  to  Get  a  "Bargain"? 
(Surgical  Dressings  Company) 296 


CONTENTS  XV 

129.  Financial  Difficulty  Arising  from  Buying,  Due 
to  "Guessing"  the  Market  Wrong.  {Leather 
Export) 297 

130.  A  Problem  of  Financing  Imports (Indigo)   299 


CHAPTER  VII 
FINANCIAL  ASPECTS  OF  PRODUCING  GOODS 

A.     COSTS  AND  FINANCE 

Exercise  III.     Problem   on    the   Relations    Betiveen    the 
Business  Cycle,  Costs  of  Production,  Net  Profits,  etc. .  .   302 

131.  How  Shall  the  Overhead  I)e  Reduced? 3C3 

132.  Reducing  Costs  Through  Specialization  in  Pro- 
duction.    (Woolen  Mill) 3C4 

133.  Reducing  Costs  Through  Quantity  Output.  {Cot- 
ton Textile  Company) 305 

134.  "  Making  Money  at  a  Loss '  '—Selling  Below  Cost  306 

135.  Should  the  Selling  Price  be  Uniform  Irrespective 

of  Costs?     (Knit  Underwear) 307 

136.  Is  a  Concern  Well  Advised  in  Making  Some 
Goods  for  Which  the  Market  is  Small?  (Machine 
Parts  Company) 3C8 

137.  Ignorant  Competition,  Cost, and  Failure.  (Chemi- 
cal)     309 

138.  What  Effect  Would  a  Reduction  in  the  Number 

of  Styles  Have  on  the  Co-;t  of  Production? 310 

139.  The  Possilile  Financial  Gains  of  Greater  Stand- 
ardization in  Pioduction 311 

A.     REDUCING  COSTS  THROUGH  INCREASED  SIZE- 
COMBINATIONS  HORIZONTAL  AND  VERTICAL, 
AND  DEVELOPMENT  OF  SUBSIDIARIES 

Exercise  IV.     The  Financial  Economies  of  Size 312 

Exercise    V.     The  Financial  Results  of  Combinations  of 
Various  Sorts 312 

140.  Financial  Advantages  of  Size 313 


xvi  PROBLEMS  IN  BUSINESS  FINANCE 

141.  Financial  Considerations  Involved  in  Combina- 
tions.     314 

142.  Financial  Advantages  of  the  Chain  Store 314 

143.  Financial  Problem  of  a  Department  Store 314 

144.  Certain  Financial  (Considerations  Involved  in  the 
Integration  of  a  Business.     (Press  Companies)  . .   315 

145.  Possible  Financial  Gains  of  Vertical    Combina- 
tion or  "Integration" 316 

146.  The  Development   of  Subsidiary  and  Affiliated 
Companies 316 

CHAPTER  VIII 
FINANCIAL  ASPECTS  OF  SELLING  GOODS 

A.  GENERAL  PROBLEMS  OF  THE  CREDIT  DEPARTMENT 

147.  Standards  for  Credit  Granting 318 

148.  The  Credit  Policy  and  the  Business  Cycle 320 

149.  The  Small  Concern  and  the  Mercantile  Agency.  .  321 

150.  The  Abuse  of  Credit  Interchange 323 

151.  Is  Credit  Interchange  Dependable? 324 

152.  Extending  Credit  on  the  Financial  Statement    .  .  325 

153.  The  Statement  and  the  Business  Cycle 327 

154.  Easy   Credit   Granting    and    Low    Debt   Losses. 

(Coffee  Jobber)    328 

155.  Guaranteeing    the    Account   by   Officers   of  the 
Buying  Concern 329 

156.  Does  Easy  Mercantile  Credit  Cause  Retail  Fail- 
ures?    330 


B.    RELATIONS  BETWEEN  CREDIT  DEPARTMENT  AND 
SALES  DEPARTMENT 

157.  Shall  the  Credit  Man  Antagonize  His  Salesman 
and  Turn  Down  a  "Sure  Pay"  Customer?  (Whole- 
sale House) 331 


CONTENTS  xvii 

158.  Cooperation  lietwoeii  the  Sales  and  Credit  De- 
partments      332 

159.  "Putting  It  Up  to  the  Salesman" 334 

160.  The  Value  of  References  Secured  by  the  Salesman  335 

101.     Relation  between  the  Credit  Risk  and  the  Meth- 
od of  Paying  Salesmen 330 

162.  Should  the  Credit  Department  Tolerate  "Irreg- 
ular" Terms  of  Sale  Given  by  the  Salesman?  ...   336 

163.  How  Far  Should  the  Salesman  be  Trusted?    {Cor- 
set Company) 337 

C.     COOPERATION  WITH  THE  CUSTOMER 

164.  Dealer  Cooperation.    {Maker  of  Paints  and  Var- 
nishes)     339 

165.  Financial  Cooperation  between  Dealer  and  Cus- 
tomer.    (Rubber  Company) 340 

166.  Educating  the  Customer  to  Buy  Light  and  Take 
Losses  Early 341 

D.  SALES  POLICIES 

167.  Seasonal  Datings 343 

168.  Pushing   Sales  by  a   Bold    Method.      {Petticoat 
Company)  344 

169.  "One  Cent"  Sales.    {Rexall  Stores) 345 

170.  The  Turnover  and  Business  Profits 345 

171.  Can  the  Dealer  Prevent  "Bargain  Sales"? 347 

172.  The  Financial  Significance  of  the  Sales  Policy — 
Selling  to  One  Large  Customer.     (Lamp  Maker) .    348 

E.  PRICE  POLICIES 

173.  Relation   between  a  P^ixed   Sales   Piice  and    the 
Financial  Program 350 

174.  Price    Guarantees.      {Wholesale   Hardware   Com- 
pany)     352 


xviii         PROBLEMS  IN  BUSINESS  FINANCE 

175.  Increasing  the  Turnover  and  Decreasii  g  Can- 
celations hv  Reducing  Prices  Even  on  Goods  Al- 
ready Sold.     {Shirt  Mntnifnctiirer) 352 

176.  Effect  of  Price  Reductions 355 

177.  Relation  between  Piice  Policy  and  General  Finan- 
cial Policy  During  a  Period  of  Depression.  {Ladies' 
Ready  Made  Suits) 355 

178.  The  Relation  between  Cost  of  Production  and 
Market  Price 358 


F.    DISCOUNTS 

179.  Quantity  Discounts 359 

180.  Relation  of  Trade  Discounts  to  Quantity   Dis- 
counts.   {Dennison  Company) 360 

181.  The  Cash  Discount — Theory  vs.  Practice 365 

182.  The  Cash  Discount  "  Piracy  " 366 

183.  Letters  on  the  Cash  Discount 367 


G.    COLLECTIONS 

184.  Charging  Interest  on  Past  Due  Accounts 368 

185.  Collections  and  the  Business  Cycle 370 

186.  The  Cost  of  Small  Collections 371 

187.  Trade  Acceptances  vs.  Collection  Letters 372 

188.  Collecting  the  Bills  or  Accepting  the  Returned 
Goods.     {Retail  Millinery) 373 

189.  Novel  Collection  Methods 374 

190.  Sample  Collection  Letters 376 

H.    FINANCIAL  ASPECTS  OF  ADVERTISINC. 

191.  Relation  of  Advertising  to  Sales  {Men's  Clothing)  378 

192.  Was  Advertising  Responsible  for  the  Financial 
Success  of  This  Concern?  {Electric  Cable  Com- 
pany)      379 


CONTENTS  xix 

103.  The  Financial  Clains  t'roru  Adveitisinp; 380 

194.  Advcitisins  ant!  Business  Profits 380 

195.  Advertising  to  Aitl  "Seasonal"  Business 381 

196.  Dealer  Advertisinji;  and  the  Distributor 382 

197.  Does  Advertising  Aid  the  Credit  Seeker? 382 

198.  How  Much  Can  a  Candy  Company  Afford  to 
Spend  in  Advertising? 383 

CHAPTER  IX 
THE   ADMINISTRATION  OF  EARNINGS 

199.  Should  a  New  Building  Have  Been  Financed  out 

" — ^       of  Surplus  Earnings?     (Department  Stoi-e) 386 

200.  General  Problem  on  Dividend  Policy.  {American 
Telephone  and  Telegraph  Companij) 388 

201.  Relation  of  Dividend  Declaration  to  Emergence- 
Financing.      (Rubber  Tire  Company) 391 

202.  Shall  Dividends  be  Declared   or  Shall   Earnings 

be  Used  for  Plant  Extension?     (Shoe  Company) .   393 

203.  How  Large  a  Surplus  Should  a  Concern  Have?  . .   399 

204.  Shall  Competitors  be  Bought  up  With  Surplus 
Funds?    (Cotto7}  Cloth  Mill) 400 

PART  IV-FINANCIAL  DIFFICULTIES 
AND  THEIR  SIGNIFICANCE 

CHAPTER  X 

FINANCIAL  INVOLVEMENTS,  ADJUSTMENTS, 

RECEIVERSHIPS.  BANKRUPTCIES, 

REORGANIZATIONS,   ETC 

Exercise  VI.  What  Has  Been  the  Actual  Financial 
Position  of  Business  Concerns  at  the  Time  of 
Failure'! 405 

205.  The  General  Credit  Situation  in  1921 405 

206.  Will  Failures  Increase  as  Industrv  Revives? 409 


XX  PROBLEMS  IN  BUSINESS  FINANCE 

207.  How  Far  Should  Creditor  Cooperation  be  Carried 

in  Critical  Peiiods? 410 

208.  Improving  the  Credit  Position  of  a  Small,  Closely 
Owned  Concern  by  Jup;slins  the  Securitie.s. 
{Shoe  Company) 411 

209.  Improving  the  Current  Position  by  a  Readjust- 
ment of  Ownership.     [Paper  and  Pulp  Com  pan  tj)  413 

210.  The  Part  Which  Protective  Provisions  Surround- 
ing a  Security  Issue  May  Play  in  a  Company's 
Solvency 414 

211.  Avoiding  a  Serious  Financial  Dilemma  Through  a 
Debenture  Issue.     (Machine  TooLs  Company)  ....   415 

212.  Possible  Consequences  of  Heavy  Commitments. 
{Cotton  Mill) ' 419 

213.  Threatened  Failure  Due  to  "Overbuying." 
{Leather  Company) 420 

214.  How  Far  Should  the  Stockholders  Go  in  Their 
Attempts  to  Save  a  Company  from  Failure? 
{National  Conduit  and  Cable  Company) 422 

215.  Banker  Control  and  the  Credit  Problem  in  Times 

of  Financial  Stress.     {Tanning  Company) 424 

216.  Difficulties  Arising  Through  an  Attempt  to  Fi- 
nance an  Expansion  by  Means  of  Current  Loans 
and  Dealer  Credit.     {Confectionery  Company).  ..   427 

217.  Shall  a  Strong  Concern  Which  is  the  Victim  of 
Hard    Luck    be    Allowed    to    Fail?      {Chocolate 

Company) 428 

218.  Attempting  to  Save  a  Concern  Engaged  in  the 
Cuban  Trade  by  a  Further  Extension  of  Bank 
Loans.     {Shoe  Exporter) 430 

219.  The  Reorganization  of  a  Cotton  Matuifacturing 
Concern  by  a  Bankers'  Committee 432 

220.  How  Shall  a  Company  be  Saved  from  Bank- 
ruptcy, Part  of  Whose  Business  is  Good  and  Part 
of  Which  is  Being  Carried  on  at  a  Loss? 
{Leather  Company) 435 

221.  Bankruptcy  of  a  Small  Concern  and  Reorganiza- 
tion by  its  Bank.     (Elevator  Company) 437 


CONTENTS  xxi 

222.  Readjustment  of  Debt  and  Capitalization  of  the 
Goodyear  Tire  &  Rubber  Company 442 

223.  A  History  of  the  Financial  Difficulties  and  the 
Private  Reorganization  Plans  of  a  Small  Auto- 
mobile Company 446 


PART  V— GENERAL  PROBLEMS 

CHAPTER  XI 
GENERAL  SURVEY  PROBLEMS 

224.  The  Financial  Growth  of  a  Small  Musical  Con- 
cern     462 

225.  Promotion,  Expansion,  Receivership,  and  Sale  of 
Assets  within  Five  Years.  (Factory  Equipment 
Company) -^69 

226.  The  Financial  Problems  of  a  Small,  Newly  Organ- 
ized Refrigerator  Company 47S 


STATISTICAL  APPENDIX 

I.     Number  and  Size  of  Industrial  Concerns 
IN  THE  United  States 487 

a.  Suminaiy   of   Manufacturing    Indus- 
tries in  ttie  United  States. 

b.  Manufacturing  Concerns  in  the  United 
State?,  Classified  According  to  Size. 

II.  Analysis  of  the  Balance  Sheets  of  Lead- 
ing Industrial  Concerns  p'or  the  Year 
1918 489 

III.  Statement  of  the  Capital  and  Financial 
Results  of  Operation  of  250  Important 
Leading  Industrial  Companies  for  the 
Years    1911-1918,    Inclusive 491 

a.  Farm  and  Household  Supplies. 

I).  Industrial  Material  and  Equipmet.t. 

IV.  Percentage  of  the  Various  Types  of  Se- 
curities OUTSTANDIN(;  IN  TyPICAL  INDUS- 
TRIAL Companies  by  Five-Year  Periods, 
1900-1920 492 

a.  Coal  and  Iron  (Companies. 

b.  Iron  and  Steel  Companies. 

c.  Railroad  Equipment  Companies. 

d.  Sugar  Companies. 

e.  Mining  Compa  iies 

f.  Oil  Companies 

g.  Tobacco  Companies. 

h.  Automotive  and  Automobile  Accessory 
Companies. 

V.  Standards  for  Credit  Granting  in  Var- 
ious Industries 494 

a.  Wholesale  Dry  Goods. 

b.  Wholesale  Hardware. 

c.  Wholesale  Grocery. 

d.  Tanners. 

e.  Drugs. 

f.  Farm  Implements. 

xxii 


CONTENTS  xxiii 

g.  Lumber, 
h.  Packers, 
i.    Boots  and  Shoes. 

VI.     Financial     Standards     in     the     Rubber 

Tire  Industry 500 

VII.     FiNANCfiAL  Standards  in  the  Automobile 

Industry 502 

VIII.     Financial  Standards   in   the   Cotton   In- 
dustry    508 

a.  Average  Statement  of  Cotton  Broker, 

Based  on  43  Names, 
h.  Average  Statement  of  Cotton  Mills, 
Based  on  80  Names. 

IX.  Analy'sis  of  Expenses  in  Manufacturing 
Industries  Having  Products  Valued  at 
More  Than  S;1  00,000,000  in  1909 505 

X.     Classified  Expenses  in  Retail  Stores    ...   508 

XI.     The    Annual    Turnover    of    Stocks     in 

Retail  Stores 509 

a.  General  Retail  Stores. 
h.  Department  Stores, 
c.   Rexall  Stores. 

XII.     Relative  Advertising    Expenses   in   Typ- 
ical Concerns 510 

XIII.      The    Relation    of    Net    Income    to    In- 
vested Capital 511 

a.  Investment  and  Income  Statistics  of 
Garment  Manufacturing  Concerns 
Grouped  According  to  Invested  Capi- 
tal for  1917  and  1916. 

b.  Investment  and    Income    Statistics 
^                            of    Steel    Manufacturing    Concerns 

Grouped  According  to  Invested  Capi- 
tal for  1917  and  1916. 

XIV.     Corporation   Income  Distributed    by    In- 
dustrial Groups  ( 1918) 515 


xxiv         PUOBLEMS  IX  BUSINESS  FINANCE 

XV.  Income  and  Deductions  (1918) 518 

XVI.  Corporation  Income  and  Deductions  by 
Industrial  Groups  Showing  Amounts  Ex- 
pressed IN  Percentages 520 

XVII.     Corporation  Returns  Distributed  by  In- 
come (1918) 521 

XVIII.     The  Record  of  Business  Failures  in  the 

United  States 522 

a.  Failures,  Assets,  Liabilities  and 
Number  in  Business  in  the  United 
States,  Yearly  Since  1881  (Brad- 
street's). 

h.  Failures  in  the  United  States  and 
Canada.  Classified  According  to 
Credit  Ratings,  Liabilities  and  Cap- 
ital Employed  (Bradstreet's). 

c.  Failures  by  Branches  of  Business 
— Five  Years  (Dun's). 

d.  Causes  of  Failures  in  the  United 
States  (Bradstreet's). 


OUTLINE  AND  BIBLIOGRAPHY 


Outline  and  Bibliography  for  a  General  Course  in 

Business  Finance  Dealing  Primarily  with  Small- 

and    Medium-Sized    Industrial    Concerns 

AND  Developed  by  the  "Case" 

Method  of  Instruction 

A.     BRIEF  OUTLINE 

Note:     This   outline   should  be  carefully  looked  over  by 
the  student  be 'ore  the  problems  are  taken  up. 

I.     General  Survey 

1.  Importance  of  the  small-  and  medium-sized 
industrial  concern. 

2.  "Industrial"  Finance  r.s.  "Corporation"  Fi- 
nance. 

3.  The  financial  problems  of  Industrial  concerns 
as  compared  with  those  of  Public  Utilities  and 
Railroads. 

4.  General  differences  existing  between  the  finan- 
cial i^olicies  of  different  tyi)es  of  industrial 
concerns. 

5.  Relation  of  Business  Finance  to  the  Business 
Cycle. 

6.  What  are  the  sound  Principles  of  Business 
Finance? 

IT.     Financial    Considerations    Involved    in    Begin- 
ning A  Business 

1.  Is  the  launching  of  a  new  enterprise  financially 
justified? 

a.  The  idea. 

b.  The  time. 

c.  The  place. 

d.  The  management. 

e.  The  demand. 

f.  The  source  of  supply. 

g.  The  competitive  situation, 
h.  The  investment  market,  etc. 

xxvii 


xxviii       PROBLEMS  IN  BUSINESS  FINANCE 

2.  From  the  financial  point  of  view,  what  Form  of 

Organization  shall  he  chosen? 
Incorporated  or  unincorporated? 

3.  Where  shall  the  business  be  incorporated? 

a.  Financial  considerations  depending  upon 
State  Legislation. 

b.  Other  considerations. 

4.  Methods  of  Pioinoting  the  new  concern. 

THE  SOURCES  OF  CAPITAL 

III      The  Problems  of  Ralsing  Fixed  Capital 

a.  For  the  new  l)usiness 

b.  For  the  old  business. 

1.  The  following,  among  other  methods,  should 
l)e  consitlered  with  leference  to  the  Type  of 
Business  and  the  Business  CydP- 

a.  Individual  investment. 

1).  Investment  of  partners. 

c.  Earnings  put  l)ack  into  the  l)usiness. 

d.  Taking  new  members  into  the  concern. 

e.  Borrowing  from  friends. 

f.  Mortgages. 

g.  Advertising  for  funds, 
h.  Stock  issues, 

Common , 
Preferred, 
No  par  value,  etc. 

i.    Customer  ownership. 
j.    Investment  l)y  einploj'ees. 
k.  Note  issues. 
1.    Bonds. 

Moitgage, 
Debenture, 
Collateral,  etc. 

ni.  Dealer  ciedit. 
n.  Bank  loans. 

2.  In  connection  with  financing  for  Fixed  Capital 
purposes,  such  cjuestions  as  the  following 
should  be  touched  upon : 

a.  How  much  capital  is  needed? 

b.  How  much  capital  should  be  furnished  by 
the  parties  in  control? 


OUTLINE  xxix 

c.  Bases  of  Capitalization. 

i.  Earnings,  jjast ,  present  and  prospective, 
ii.  Physical  value, 
iii.  Valuation  of  intangibles. 
Cost  of  development. 
,  Patent  rights. 

Good  will,  etc. 
iv.  Over-capitalization  rs.  under-capi- 

talization. 
v.  "Stock  watering." 

d.  The  Prospectus  and  its  analysis. 

e.  The  local  investment  mai'kct. 

f.  Investment  "fads." 

g.  Selling  the  secuiities. 

h.  In  what  proi)ortion  shall  tlie  various  types 

of  secuiities  he  issued? 
i.    Financing    with    a  view  to   the   Business 

Cycle, 
j.    The    relation     of    the  different    kinds   of 

pei'manent  financing  to  each  othei'. 
k.  Holding  in  reserve  a  new  method  of  financ- 

iiiR". 
I.    The  desirable  distribution  of  ownership  in 

the  business. 
3,  When    and    why    does    a    concern    need    New 
Capital? 

a.  Financing  pa.>-t  losses. 

b.  Financing  changes  in  ownership 

c.  Raising    new    capital    to     make    possible 
changes  in  methods  of  operation. 

d.  Raising  new  capital  in  order  to  change  the 
character  of  the  business. 

e.  The  turning  point  from  a  small  to  a  large 
business. 

f.  Shall  other  concerns  l)e  taken  over? 

g.  Financing  an  expansion — 

Relation  to  the  Business  Cycle. 

IV.     The  Problems  of  Raising  Workin(;  Capital 

a.  For  the  new  business. 

b.  For  the  established  lousiness. 
1.  The  following  should  be  considered: 

a.  The  Amount  of  Working  Capital  needed  in 
the  different  kinds  of  business. 

b.  Money  furnished  by  individual  owners  or 
partners. 


XXX  PRUBLEALS  L\  BUSINESS  FINANCIO 

('.  Money  soH'urcd  through  salo  of  stork. 

(1.   learnings  put  l)a('k  into  th(>  l)usiness. 

c.    Usiiif!;  the  dealer's  credit. 

f.    Bori-o\vin}i  from  the  hanks. 

ii.  Bonowinfi'  tVoin  the  comniercial  paper 
house. 

h.  The  use  of  trade  acceptances. 

i.    The  use  of  hankers'  acceptances. 

j.    'I'he  pk'dgiiifi,  of  receivahles. 

k.  Tlie  sak'  of  st(jck. 

\.    Th(>  sak'  of  notes  oi-  honds. 

ni.  Boirowiiifi  thioujih  "  I'inance  Corpora- 
tions." 

n.  Newly  ck'veloped  methods  of  financing 
sales  and  puichases  thiough  specially  or- 
ji;aniz(Hl  l)ankinji'  concerns. 

o.  Miscellaneous. 

2.  Special  attention  should  he  given  to  the  follow- 
ing topics: 

a.  Borrowing  from  Banks. 

i.  What  the  borrower  should  know  about 

his  bank, 
ii.  What  the  l)ank  should  know  about  the 

industry, 
iii.  The  intangible  items. 

Character. 
Capacity. 
Good- will,  etc. 

iv.  Sources  of  credit  information. 
V.  The  Statement  and  its  analy.sis. 
vi.  The  Line  of  Cn-dit, 

How  ariived  at. 

Variation  according  to  tvpe  of  indus- 
try. 

The  Terms  of  Sale. 
The  Age  of  the  borrowing  concern. 
Past  performance. 
Future  prospects. 

The    Turnover    and    its    relation    to 
Profits. 
Relation  to  the  Business  Cycle,  etc. 

vii.  What  should  the  bank  do  for  its  bor- 
rower? 
viii.  Cooperation  between  the  bank  and  its 
customers. 


OUTLINE  xxxi 

ix.  From  how  iimny  bank^j  should  a  concern 

borrow? 
X.  Conditions  in  the  past  and  outlook  for 
the  future. 
b.The  C'ommeroial  Paper  House. 

i.  Practice  and  procedui'e. 
ii.  Relation  to  the  type  and  size  of  busi- 
ness. 
iii.   Relation  to  bank  borrowings. 
iv.  Atlvantages  and  disadvantaf^es. 
V.  The  pi'esent  situation. 

c.  The  use  of  Tiade  Acceptances. 

i.  The  development  of  the  practice, 
ii.  Relation  to  the  size  and  type  of   busi- 
ness. 
iii.  Relation  to  other  forms  of  temporary 

financing', 
iv.  Advantages  and  tlisad vantages. 
V.  Abu.ses  and  possibilities. 

THE  PROBLEMS  OF  INTERNAL  FINANCING 

V.     Financial  Aspects  of  Purchasing  Materials 

1.  Methods  and  considerations. 

2.  Contracts  and  coinniitments. 

3.  Open  market  prices  vs.  contract  prices  or  fixed 
prices. 

a.  Purchasing  in  the  l)uyer's  market. 
I).  Purchasing  in  the  seller's  market, 
c.  Purchasing  from  a  monopol3\ 

4.  Hedging  to  protect  purchases. 

0.  Under  what   considerations  shoukl  excess  pur- 
chases be  made? 

a.  Should  a  producing  concern  speculate  in 
its  raw  material? 

b.  The  evils  of  "over-buying." 

c.  Is  there  danger  of  "under-buying"? 

6.  The  seasonal  and  cyclical  considerations. 

7.  Special  methods  of  financing  purchases. 

8.  Relation  to  the  general  financial  program. 

VI.     Financial  Aspects  of  Producing  Goods 

1.  The  function  of  Cost  Accounting. 

2.  The  engineer's  function. 


xxxii         PROBLEMS  IN  BUSINESS  FINANCE 

'A.   Kliininatioii  of  Waste  and  its  significance. 
4.  'riic    possible^    financial    significance    of    Stand- 
aidization. 

0.  The    inteiielation    of    Material    Costs,    Labor 
Costs,  and  Capital  Costs. 

().  The  problem  of  icducing  costs  thiough  increas- 
ing the  "scale  of  pioduct  ion." 

7.  lielation  of  the  i)i-o(luction  program  to  the  gen- 
eral financial  program  and  the  Business  Cycle. 

\TI.     Fix.wciAL  Aspects  of  Skllixc  (ioous 

1.  Mercantile  Credit. 

a.  Standards  and  policies. 

b.  Sources  of  infoiniation. 

c.  Ci'edit  Inteichange,  etc. 

2.  Relation   between   the  Credit  Depaitment   and 
the  Sales  Department. 

8.  Financial     CoopcM-ation     between    Dealei-    and 
customer. 

4.  The  Turnover  of  inv(Mitoiyand  Business  Profits. 

Methods  of  "spccding-up"  sales,  etc. 
").  lielation  between  the  Sales  Depaitment  and  the 
Production  Dej^artiuent. 
a.  When,  if  at  all,  should  goods  ])o  sold  under 

cost? 
1).   "Over-selling." 

6.  Relation  between  Price  Policy  and  the  general 
financial  policy. 

a.  Price  maintenance. 

b.  Price  guarantees. 

c.  Price  reductions,  etc. 

7.  Terms  of  Sale. 

a.  Usual  arrangements. 
1).  Selling  on  Instalment. 

c.  Selling  on  Consignment. 

d.  Sea.sonal  Datings,  etc. 

8.  Discounts. 

a.  Cash. 

b.  Quantity. 

c.  Trade. 

9.  Contracts  and  Cancellations — 
10.  Collections. 

Methods,  policies,  etc. 
IL  Credit  Insurance,  safeguards,  etc. 
12.  The  Advertising   program   in    relation    to    the 
general  financial  program. 


OUTLINE  xxxiii 

VIII.     Financial  Coordination  and  Control 

1.  Relations  which  should  exist  between  the  vari- 
ous departments. 

2.  Budget-makinfi;. 

Its  possibihties. 
Its  significance. 

3.  The  location  of  Financial  Control. 

IX.     The  Administration  of  Earnings 

1.  Maintenance  and  Depreciation  policy. 

a.  Effect  on  present  and  future  earnings, 

b.  Relation  to  present  and  future  financing. 

2.  Reserves. 

Nature  and  investment. 
8.  Dividends. 

a.  When  shall  they  be  declared? 

1).  How  nuu'h  shall  the  dividend  be? 

c.  Various  alternative  uses  for  earnings. 

d.  Relation  to  financial  "set-up,"''  etc. 

4.  The  Suiplus. 

a.  How  shall  i1  be  invest(>d? 

1).  How  large  shall  it  become? 

c.  The  advantages  or  disadvantages  of  a  large 

surplus,  depending  on  the  type  of  business, 

etc. 


MISCELLANEOUS  PROBLEMS  IN  FINANCING 

X.     Financial  Standards  for  the  Various  Types  of 
Industries 

1.  Can  they  l)e  deteiinined,  and  of  what  use  may 
they  be — 

a.  To  the  banks? 

1).  To  the  business  concerns? 

2.  Their  relation  to  the  Credit  Structure  and  to 
the  Business  Cycle. 

XI.     Financial  Gains  and  Losses  of  Size 

1.  A  consideratio:i  of  the  relation  of  the  Scale  of 
Production  to  Business  Profits. 

2.  The    supposed     Economies    of    Combination, 
either  horizontal  or  vertical,  etc. 


xxxiv       PROBLEMS  IN  BUSINESS  FINANCE 

XII.     Financial  Coopkhatiox 

1.  Botwccn  larjic  and  small  industries. 

2.  Thioujiii  Trade  As.sociations.  etc. 

8.  BotwecMi  })usin(\ss  coneonis  and  their  employees. 

4.  Between  l)usiness  concerns  and  their  customers. 

5.  Between  business  concerns  and  their  banks, 
(i.  Cooperation  in  purchasing;. 

7.  Cooperation  in  production. 

8.  Cooperation  in  marketing. 

9.  Profit  Sharing  and  Business  Piofits. 

FINANCIAL  DIFFICULTIES  AND  THEIR  SIGNIFICANCE 

XIII.     When  Concerns  Cio  Wrong 

1.  Financial  Failures  and  their  causes. 

2.  Adjustments  and  Compositions. 

3.  Receiverships. 

4.  Bankruptcies. 

5.  Heoiganizations. 

THE  LAW  AND  BUSINESS  FINANCE 

XI\'.     Relation  of  Legislation  to   Business  Finance 

1.  Federal  and  State  Regulation. 

2.  "Blue  Sky  Laws''  and  their  possible  effects  on 
the  financing  of  sound  concerns. 

3.  Government  Price  Fixing. 

4.  Effect  of  Tax  Legislation  on — 

a.  Methods  of  financing. 

b.  Form  of  organization. 

c.  Maintenance  policy. 

d.  Dividend  policy,  etc. 


B.     BIBLIOGRAPHY 

.^  Bibliographical  Note 

THE  following  brief  Bibliography,  roughly  classified 
according  to  the  main  topics  developed  by  this  book 
of  Problems,  may  be  helpful  to  the  general  reader  as  well 
as  to  students  and  tea-'heis  of  Business  Finance.  Both 
general  and  specific  references  are  from  time  to  time  made 
to  some  of  the  books  here  listed  in  connection  with  the 
problems  which  follow.  While  it  is  by  no  means  essential 
to  the  study  of  the  problems  that  many  of  these  books  be 
looked  into,  yet  it  is  thought  that  even  the  smaller  college 
libraries  can,  without  undue  expense,  provide  themselves 
with  the  more  important  books  here  listed.  No  attempt  is 
made  to  give  a  bibliography  of  the  "Trust"  problem  or  of 
"Corporation"  Finance  in  the  wider  sense.  Nor  is  the  sub- 
ject of  Public  Utility  or  Railroad  Finance  touched  upon.^''^ 

There  are  many  points  ])rought  out  in  the  problems  which 
are  not  touched  upon  in  any  text-book  on  the  subject  of 
business  i  nance.  In  fact,  in  many  cases  the  problem 
itself  has  served  as  the  vehicle  for  imparting  the  information 
needed  by  the  student  in  finding  the  proper  solution.  How- 
ever, those  books  which  have  proved  most  helpful  in  con- 
nection with  the  use  of  the  problems  are  marked  with  an 
asteri.'^k  (*). 

For  the  sake  of  the  i)eginning  student  who  may  be 
unfamihar  with  the  better  current  publications  on  financial 
subjects,  a  list  of  the  more  important  periodicals,  news- 
papers, manuals,  and  th?  like,  is  given.  Those  marked 
with  an  asterisk  (*)  will  probably  be  most  useful. 

A  prehminary  knowledge  of  accounting  is  essential  to  the 
profitable  study  of  the  problems  which  follow.  Those 
students  who  have  not  already  had  a  course  in  accounting 
can  probably  acquire  a  working  knowledge  within  a  short 
time  under  the  instructor's  guidance.  They  will,  however, 
find  it  necessary  to  do  considerable  outside  studying  on  this 
subject.  Some  of  the  most  helpful  books  on  accounting  for 
the  beginner  are  such   as  the    following:     Cole,   W.  M,, 

'"For  general  books  on  these  fields  the  student  is  referred  to  The 
Financing  of  Public  Service  Corporations,  by  M.  B.  Ignatius,  The  Ronald 
Press  Co.,  1918,  and  to  \V.  Z.  Ripley's,  Railroads:  Finance  and  Organi- 
zation, Longman's,  Green  &  Co.,  1915. 


xxxvi       PROBLEMS  IN  BUSINESS  FINANCE 

Accounta,  Their  Consfrnclion  and  Interpretation;  Dickinson, 
A.  L.,  Accounting  Practice  an^i  [Procedure:  Hatfield,  H.  R., 
Modern  Accountinq;  Kester,  R.  B.,  Accounting,  Theory  and 
Practice  (published  in  three  volumes;  Vol.  I  is  particularly 
valuable  for  the  beginner);  Montgomery,  R.  H.,  Auditing 
Theory  and  Practice. 

The  student  or  general  reader  who  has  not  already 
acquired  a  working  knowledge  of  Business  Finance,  is 
strongly  advised  to  glance  through  one  of  the  standard 
text-books  on  the  subject.  For  a  general  survey  which 
will  be  most  helpful  in  connection  with  these  problems,  the 
writer  has  found  Lough's  Busine^^s  Finance  to  be  easily  the 
most  satisfactory. 


I.     General  Books  on  Business  and 
I      Corporation  Finance,  Etc. 

The  following  books  cover  the  various  aspects  of  Bu.siness 
and  Corporation  F  nance  in  a  general  way.  Certain  parts 
of  these  books  will  be  useful  in  connection  with  the  more 
detailed  topics.  For  this  purpose,  however,  references  will 
be  made  in  connection  with  the  problems  them  elves  when 
it  seems  desirable. 

Bennett,  R.  J.,  Corporation  Accounting.     New  York,  The 
Ronakl  Press  Company,  1020. 

Bentley,  H.  C.,  Corporate  Finance  and  Accounting.     New 
York,  The  Ronald  Press  Company.  1911. 

*Conyngton,  H.  R.  Financing  an  Enterpri.'<e.  New  York, 
The  Ronald  Press  Company,  1921. 

Cooper,  F..  (P.scudonym).  Financing  an  Enterpri.se.     New 
York,  The  Ronald  Press  Company,  1906. 

*  Dewing,  A.  S.,  Corj)orate  Promotions  and  Reorganizations. 
Cambridge,  Harvard  University  Press,  1914. 

*Dewing,  a.  S.,  The  Financial  Policy  of  Corporations. 
New  York,  The  Ronald  Press  Company,  1920. 

*Dewing,  a.  S.,  Problems  to  Accompany  The  Financial 
Policy  of  Corporations.  The  Ronald  Press  Companv, 
1921.' 

Friday,  David,   Profits,  Wages,  and  Prices.     New   York, 
Harcourt,  Brace,  and  Howe,  1920. 

Gerstenberg,  C.  W.,  Materials  of  Corporation   Finance. 
New  York,  Prentice-Hall  Company,  1915. 


BIBLIOGRAPHY  xxxvii 

*Gebstenbekg,  G.  W.,  Problems  in  Private  Finance.     New 
York,  Prentice-Hall  G()ini)any,  1910. 

*GERTENBER(i,  G.   W.,  Principles  <[f  Hiisincss.     New  York, 
Prentice-Hall  Gonipaiiy,  H)1S.  " 

*Gerstenhiokg,    G.    W.,    S /llabns   of   Corporation    Finance. 
New  York,  Prentice-Hall  (\);np'iny,  1920. 

Greene,   T.   L.,   ('orp<n-alion    Finance.     New  Yoi'k,  (j.  P. 
Putnam's  Sons,  lOOS. 

.Ienks,  J.  and  Glvrk,  W.   K.,   The   Tru.st  Problem.     New 
York,  Doubleday,  Pajio  &  Company,  1917. 

*Jc)NES,  E.  I).,  77/c  Adiniiiistration  of  Industrial  Fnterprises. 
New  York,  Lonjiinans,  (ireen  ct  Company,  1919. 

Keir,  M.,  Man'iJ.ictnrintj  Industries  in  the   United  States. 
New  York,  The  Ronald  Press  Company,  1920. 

*LouGH,  W.  H.,  Business  Finance.     New  York,  The  Ronald 
Press  Com])any,  1917. 

*LouGn,  W.  H.,  Corporation  Finance.    (  hicago,  Ee-Bower, 
Elliott  Company,  1909. 

*Lyon,  Hastings,  Cen-poraticn  Finance.     Boston,  Houghton 
Mifflin  Company,  1910. 

*Me.\d,  E.  S.,  Corporation  Finance.     New  York,  D.  Apple- 
ton  and  Company,  1920. 

Mitchell,  W.  C.,  Business  Cycles.   Berkeley,  California, 
University  of  California  Press,  1913. 

*AIouLTON,    H.    G.,    Financial     Organization     ef    Society. 
Chicago,  The  University  of  Chicago  Press,  1921. 

MouLTON,  H.  (t..  Principles  of  Money  and  Banking,  Part 
II.     Chicago,  The  University  of  Chicago  Press,  1916. 

*Pratt,  E.  S.,  Work  of  Wall  Street.     New  York,  D.  Apple- 
ton  and  Company,  1912. 

Prendergast,  W.  a.,  Credit  and  Its  LLses.    New  York,  D. 
Appleton  and  Company,  1920. 

*Regan,   J.   M.,   Financing  a    Business.     Chicago,    I  aSall.? 
Extension  University,  1920. 

Shaw,  A.  W.,  An  Approach  to  Business  Problems.     Cam- 
bridge, Harvard  University  Pre\ss,  1916. 


xxxviii     PROBLEMS  IN  BUSINESS  FINANCE 

*Shaw,  a.  W.,  Comparv.  Hoir  to  Fincnce  a  Businesf. 
Chicago,  1912. 

*Walker,  W.  H.,  Corporation  Finance.  New  York, 
Alexander  Hamilton  Institute.  1917. 

II.     General  Problems  of  Organization — 
Legal  Aspects,  Etc. 

*CoNYNGTON,  Thomas,  Corporate  Organizaticn  and  Man- 
agement. New  York,  The  Ronald  Press  Conipary, 
1917. 

*CoNYNGTON,  Thomas,  Buslne.s.s  Lair.  New  York.  The 
Ronald  Piess  Company,  1918. 

Gerstenberg,  C.  W.,  Law  of  Bankruptcy  {with  problems). 
New  York,  Prentiee-Hall  Comparv,  1917. 

*(1erstenberg,  C.  W.,  Organization  and  Control.  New  York, 
Alexander  Hamilton  Institute.  1917. 

Haney,  L.  H.,  Bu.sines.s  Organization  and  Ccmbination. 
New  York,  The  Macmillan  Company,  1920. 

Machen,  a.  W.,  Modern  Law  of  Corporation.^.  Boston, 
Little,  Brown  and  Company,  1908. 

Moore,  W.  H.,  The  Law  (f  Commercial  Paper.  New  York, 
D.  Appleton  and  Company,  1918. 

*RoBiNSON,  M.  H.,  Organizing  a  Bu.'<ine.^.<^.  Chicago,  La 
Salle  Extension  University,  1920. 

*ScHAUB,  L.  F.,  and  Isaacs.  N.,  The  Law  in  Busimse  Prob- 
lems.    New  York,  The  Macmillan  Company,  1921. 

Stetson,  Byrne,  Cravath,  et  al.,  Some  Legal  Phases  of 
Corporatic  n  Financing,  lieorganization,  and  Regulation. 
New  York.  The  Macmillan  Company,  1917. 

WiLLiSTON.  Samuel,  Coninwrciol  and  Banking  Law.  Nevv 
York,  American  Institute  of  Banking,  1918. 

Wrightington,  S.  R.,  Law  of  Unincorporated  A s.sociations. 
Boston,  Little,  Brown  and  Company,  1916.  \ 

IIL     The  Problems  of  Raising  Fixed  Capital 

Atwood,  a.  W.,  The  Exchanges  and  Speculatioji.  New 
York,  Alexander  Hamilton  Institute,  1918. 


BIBLIOGRAPHY  xxxix 

Bonds  as  Investment  Securities.  Annals  of  the  American 
Academy  of  Political  and  Social  Science,  1907. 

Chamberlain,  Lawrence,  The  Work  of  the  Bond  House. 
New  York,  Moody's  Magazine,  Book  Department,  1912. 

*Chamberlain,  Lawrence,  Principles  of  Bond  Investment, 
Parti.     New  York,  Henry  Holt  and  Company,   1911. 

*Collver,  Clinton,  How  to  Analyze  Industrial  Securities. 
New  York,  Moody's  Investors  Service,  1921. 

Emery,  H.  C,  Speculation  on  the  Stock  and  Produce  Ex- 
changes in  the  United  States.  New  York,  The  Mac- 
millan  Company,  1904. 

*JoNES,  E.  D.,  Investment.     New  York,  Alexander  Hamilton 
Institute,  1917. 

*JoRDAN,    D.    F.,    Investments.     New    York,    Prentice-Hall 
Company,  1920. 

*I  AGERQUIST,  Investment  Analysis.     New  York,  The  Mac- 
millan  Compang,  1921. 

Raymond,  W.  L.,  American  and  Foreign  Investment  Bonds. 
Boston,  Houghton  Mifflin  Company,  1916. 

Simpson,  K.,  The  Capitalization  of  Goodwill.  Baltimore, 
Johns  Hopkins  Press,  1921. 

Stocks  and  the  Stock  Market.  Annals  of  the  American  Acade- 
my of  Pohtical  and  Social  Science,  1910. 

Stockwell,  H.  G.,  Net  Worth  and  the  Balance  Sheet.  New 
York,  The  Ronald  Press  Company,  1912. 

Most  of  the  general  books  Usted  under  Topic  I  give  a 
good  deal  of  attention  to  this  subject. 

IV.     The  Problems  of  Securing  Working  Capital 

American  Acceptance  Council.  Various  pamphlets  on  the 
problem  of  acceptances  arc  useful. 

*Babson,  R.  W.,  and  May,  R.,  Commercial  Paper.  Wellesley 
Hills,  Mass.,  Conunercial  Institute,  1920. 

*Greendlinger,  L.  G.,  Financial  and  Business  Statements. 
New  York,  Alexander  Hamilton  Institute,  1917. 

Kemmerer,  E.  W.,  The  A .  B.  C.  of  the  Federal  Reserve  System 
(4th  ed.).     Princeton,  The  Tnivcrsity  Press,  1920. 


xl  PROBLEMS  IX  BUSINESS  FINANCE 

*KxiFFiN,  W.  H.,  The  Bu.siness  Man  and  ///^•  Bank.  New 
York,  Mcdraw-Hill  Company,  1920. 

*KxiKFix,  W.  II.,  Connncrcial  Paper,  Acceptances,  and 
Analj/.^is  of  Credit  Statements.  New  York,  Haiik(M's' 
Pul)lishiiiji-  Company,  191S. 

K.MKFIX,  \\'.  11.,  77/r  Pnutieal  Woric  of  a  lionl:.     Xcw   ^'oik, 
Bankers'  PiiMishinti-  ("ompaiiy,  191."). 

LAX(iSTOX,  L.  II.,  Proelieal  Baid;  Operations.      New    ^'oi'k, 
'rh(>  Ronald  Prc^s  Company,  1921. 

■^M.\THKWS()X,  Park,  Aeeeptanees:  Trade  and  Banl^ers. 
New  York.  1).  .\ppl('toii  and  Company.  1921. 

INIathewsox,    Park,    Budgets    and    the    Banker.     Bento:i 
Harbor,  Mich.,  Successful  Banking,  1920. 

^Phillips,  C.  A.,  Bank  Credit.  New  Yoik,  The  Macmillan 
Comi)any,  1920. 

*Shaw,  A.  W.,  i\m\pi\UY,  Credits  and  Colleetions.  Chicaojo, 
1918. 

Wall,  Alexaxdek,  Banker.^'  Credit  Manual.    Indianapolis, 
The  Rohbs-Morrill  Company,  1919. 

*Wall,  Alexaxder,  Credit  Barouietrics.  Detroit,  National 
Bank  of  Commerce,  1919.  (Also  in  Federal  Resci've 
Bulletin,  March,  1919.) 


V.     Financial  Aspects  of  Purchasing  Goods 

*Brace,  H.  H.,  The  Value  of  Organized  Speculation,  Chaps. 
II-IV.     Boston,  Houghton  Mifflin  Company,  1913. 

Field,  C.  C.,  Retail  Buijinq.    New  York,  Harper  and  Broth- 
ers, 1917. 

RiXDSFoo.s,  C.  S.,  Purchasing.     New   York,  Mc(i raw-Hill 
Company,  191.5. 

*Tavyf()rd,   H.   B.,   Purchasing  and   Storing.      New    Yoik, 
Industrial  Extension  Institut(\  1917. 

There  are  chapters  on  this  subject  in  such  books  as 
Gerstenl)erg's  Principles  of  Business,  Jones'  Administraticn 
of  Industrial  Enterprises,  and  Kimball's  Principles  of  Indus- 
trial Organization.  No  satisfactory  bibliography,  however, 
is  available. 


BIBLIOGRAPHY  xli 

VI.     Financial  Aspects  of  Purchasing  Goods 

^Basset,  W.  R.,  Accounting  <is  an  Aid  in  Easiness  Projits. 
Chicaf^o,  A.  W.  Shaw  Gompary,  1918. 

Berndt,  I.  A.,  Costs:  Their  Compilation  and  Use  in  Man- 
(ujenient.     Gliicafio,  H.  P.  Gould,  1920. 

Ghurch,  A.  H.,  Manufocturing  Costs  and  Accounts.  New 
York,  The  INIcGiaw-Hill  Book  Goinpany,  1917. 

I'^iCKER,  N.  T.,  Industrial  Cost  Finding.  New  York,  In- 
clusii'ial  Extension  Institute,  Inc.,  1917. 

Goldman,  ().  B.,  Financial  Enqineering.  New  York, 
.John  Wik'v  and  Sons,  1920. 

MoHDAX,  ,1.  P.,  and  Harris,  G.  L.,  Cost  Accounting  Princi])les 
and  Practice.  New  York,  The  Ronakl  Press  Gonipany, 
1920. 

Mitchell,  W.  C,  History  of  Prices  During  the  War.  Wash- 
ington, Goveni'iier.t  Printing  Office,  1919.  (War  In- 
dustries Board.) 

Nicholson,  ,J.  L.,  and  Rohrbach,  J.  F.  D.,  Cost  Accounting. 
New  York,  Tlie  Ronald  Press  Goinpany,  1919. 

*Sammons,    Wheeler,    Keeping     up     with     Rising    Costs. 
Ghicago,  A.  W.  Shaw  Gonijiany,  I9l.i. 

*ScovELL,  G.  H.,  Cost  Accounting  and  Burden  Application. 
New  York,  D.  Appleton  &  Gonipany,  1916. 

Shaav,  a.  W.  Gonipany,  Operation  and  Costs.  Ghicago, 
1915. 

Spooner,  H.  J.,  WeaWi  front  Waste.  London,  (ieoige  Routr 
ledge&  Sons,  Ltd., 'l PIS. 

U.  S.  Federal  Trade  Gonmiission,  Fundamentals  of  a  (\)st 
Sijsteni  fcr  Manrfacturers.  Washirgton,  (loverninent 
Printing  Office,  191(). 

Webner,  F.  E.,  Factor!/  Costs.  New  Yoi'k,  Tie  lionald 
Press  Goinpany,   191  L 

See  also  various  titles  uiidei-  Topic  IX,  Financial  Stand- 
ards and  the  Financial  Economies  of  Size. 

VII.     Financial  Aspects  of  Selling  Goods 

,  AsPLEY,  J.  G.,  Tr/(a/  a  Salesman  Should  Know  About  Credit. 
Ghicago,  The  DartnellC^oipoiation.  1021. 


xlii  PROBLEMS  IN  BUSINESS  FINANCE 

Beebe,  D.  E.,  Retail  Credits  and  Collections.  New  York, 
Harper*  Brotliers.  1919. 

Blvxton,  B.  H.,  Credit,  Its  Principles  and  Practice.  New 
York,  The  Ronald  Press  Company.  1915. 

*Cheringt()N,  p.  T.,  Adrertising  as  a  Bjtsiness  Force.     New 
York,  Douhleday,  Pa^e  and  Company,  1913. 

*DuNCAN,    C.    S.,.  Marketing,    Its    Problems   and   Methods. 
New  York,  I).  Appleton  and  Company,  1921. 

*Ettinger,  R.  p.,  and  Golieb,  D.  E.,  Credits  and  Collections. 
New  York,  Prentice-Hall,  Inc.,  1917. 

*Frederr'k,  J.  G.,  Modern  Sales  Management.     New  York, 
D.  Appleton  and  Company,  1920. 

Hagerty,  ,J.  E.,  Mercantile  Credit.  New  York,  Henry 
Ho't  and  Company,  1913. 

Lawrence,  H.  C,  Cash  Discount  Piracy.  St.  Louis, 
Consolidated  Publishing  Company,  1919.  (Also  Mak- 
ing Him  Pay,  and  Making  Him  Buy,  l)y  the  same 
author.) 

Mercantile  Credits.  New  York,  The  Ronald  Press  Com- 
pany, 1914. 

Meyer,  C.  A.,  Mercantile  Credits  and  Collections.  New 
York,  The  Macmillan  Company.  1919. 

Mitchell,  W.  C,  History  of  Prices  During  the  War.  Wash- 
ington, Government  Printing  Office,  1919.  (War  In- 
dustries Board.) 

MuRCHisoN,  C.  T.,  Resale  Price  Maintenance.  New  York, 
Longman,  Green  &  Company  (for  Columbia  University), 
1919. 

National  Association  of  Credit  men.  Credit  Man's  Diary, 
published  annually.     New  York, 

Naylor,  E.  H.,  Trade  Associations.  New  York,  The 
Ronald  Press  Company,  1921. 

Rogers,  E.  S.,  Goodwill,  Trade  Marks,  and  Unfair  Trading. 
Chicago.  A.  W.  Shaw  Company,  1914. 

Shaw,  A.  W.,  Companv,  Credits,  Collections,  and  Finance. 
Chicago,  1914. 

Terms  of  Sale.  A  Series  of  articles  in  the  Federal  Reserve 
Bulletin  from  December,  1919,  to  October,  1920. 


bibli()(;haphy  xiiu 

U.  S.  Federal  Trade  ( "oininission,  Digest  <'f  He  plies  Relative  to 
the  Practice  of  (iirhuj  (Uiarantees.  Against  Price  Decline. 
Washington,  Govcninicnt  Piiiitin<>  Office,  1920. 

VIII.     Administratiox  ok  Income  and 
Financial  Conirol 

*Dewing,  a.  S.,  Financial  Polic>i  of  Corporations.  Vol.  Ill, 
The  Administration  of  In  conic.  N<n\  York,  The 
Ronald  Press  Company,  1920. 

*LouGH,  W.  H.,  Business  Finance,  Part  IV,  pages  355-524. 
New  York,  The  Ronald  Press  Company,  1917. 

Lough,  W.  H.,  Corporation  Finance,  297-398. 

McKiNSEY..].  O.,  A  series  of  articles  on  Budgetary  Control,  in 
Administration,  beginning  in  January,  1921.  New 
York,  The  Ronald  Press  Companj%  (To  be  published 
later  in  book  form.) 

*Mead,  E.  S.,  Corporation  Finance,  Cha^s.  XIV-XVIII. 

Shaw,  A.W.,An  Approach  to  Business  Problems,  Ch.  XVIII. 
Cambridge,  Harvard  University  Press,  1916. 

Some  of  the  othei-  books  listed  touch  upon  these  sub- 
jects, but  comparatively  little  has  hitherto  been  written. 
The  magazines,  Administration  and  System,  frequently 
publish  helpful  articles  beaiing  on  the  subject. 

IX.     Financial  Standards  and  the  Financial 
Economies  of  Size 

^'ery  little  scientific  writing  had  been  done  on  thivS  sub- 
ject. Most  of  the  material  is  of  a  fugitive  sort.  The 
following,  however,  will  be  helpful  to  those  who  wish  to 
make  a  beginning: 

*Corporate  Earnings  and  Government  Revenues,  6oth  Congress, 
2nd  Session,  Senate  Document  No.  259.  Washington, 
Government  Printing  Office,  1918.  (Contains  much 
useful  "raw"  material.) 

Costs,  Merchandising  Practices,  and  Sales  in  the  Retail  Distri- 
bution of  Clothing.  In  6  volumes,  covering  the  years 
1914,  1918  and  1919.  New  York,  Prentice-Hall  Com- 
pany, 1921  (Prepared  by  the  Bureau  of  Business  Re- 
search of  the  Northwestern  University'  School  of  Com- 
merce in  cooperation  with  the  National  Association  of 
Retail  Clothiers.) 


xliv         PKOBLKMS  IX  lUSlXKSS  FINAXCK 
Dewing,  A.  S.,  Corjforatc  Promotions  and  Rearqanizr.ticns 

*Di:wi\G.  A.  S.,  The  Financial  Policy  of  CorporaticnH. 
Vol.  IV.,  Chap.  II,  "The  Law  of  Balancod  Roturn/'and 
Chap.  Ill,  "Industiial  Conihinatioiis." 

*Harvard  Bureau  of  Business  Reseai'eh.  \'eiy  iiiteicsting 
and  helpful  bulletins  have  been  published  dealing  with 
the  expense  side  of  the  question  on  the  following  tlistrib- 
uting  businesses:  Retail  Drug,  Retail  drccery,  Retail 
Hardware,  Retail  Jewelry,  Retail  Shoe,  Wholesale  Grocery. 
Other  l)ulletins  aie  to  be  jiublished  shottly,  K)n)e  of 
which  will  piobably  deal  with  uianufaeturing  concerns. 

*LiNCOLN,  E.  E.,  Central  Electric  Liijhl  and  Power  Stations, 
1917,  Chap.  X.  Washington,  (Jovernment  Printing 
Office,  1920. 

*LouGH,  W.  H.,  Business  Finance,  Ch.  XXII.  Xew  Yoik, 
The  Ronald  Press  Companj'^,  1917. 

Massachusetts,  Abstract  <J  the  Certificates  of  Corpcraticns 
(published  annually),  Pubhc  Document  No.  10.  Boston, 
Wright  &  Potter.  ' 

Massachusetts,  Statistics  of  Manufactures  (publi&hcd 
annually).  Public  Document  X"o.  36.  Boston,  Wright 
&  Potter. 

Robert  Morris  Associates,  Boronietrics.  Lansdowne,  Pa., 
1920. 

Rol)ert  Morris  Associates,  Financial  Statements.  Lar  s- 
downe,  Pa.,  1920. 

*Sallee,  a.  D.,  Standard  Retail  Statements.  Pittsbuigh 
Association,  of  Credit  Men,.  1921. 

Shaw,  A.  W\,  Company,  How  to  Run  a  Retail  Lundwr  Busi- 
7iess  aia  Pre  fit.     Chicago,  1918. 

Shaw,  A.  W.,  Company,  How  to  Run  a  Store  at  a  Profit. 
Chicago,  1913. 

Shaw,  A.  W.,  Company,  How  to  Run  aWholesale  Business 
at  a  Profit.     Chicago,  1918. 

*Shaw,  a.  W.,  Company.     The  Bureau  of  Business  Stand- 
ards of  the  A.  W.  Shaw  Comjiany,  publishes  fiom  time 
.  ;-to  time  suggestive  reports  on  the  subject  of  standards, 
costs,  etc. 


RIBIJOGRAPHY  xlv 

Stati-'tics  rf  I na  mc ,  coinpilcd  fiom  the  ietui'i:s  for  1918  by 
the  ( "onini.ssioror  of  Iiitcinal  Keveniio.  Washington, 
('.o.-iM'nnirnt  Printing- Off^lco,  1921. 

ITnit.d  States  Census  Bureau,  Thirteenth  Cen.su.s  <>f  the 
United  States,  1910,  Voh  VIII,  Manufactures. 
(This  volume  is  perhaps  the  most  serviceable  pubhshcnl  I  y 
the  Fedei-al  Census  of  Manufactures,  since  it  contains 
more  detailed  infoimation  on  the  vai'ious  classes  of 
production  ex}iense  than  can  be  found  in  any  preceding 
Census.  The  Abstract  of  the  Census  of  Manufactures 
for  1914  is  al-'o  iielpful  in  places.) 

United  States  Commissioner  of  Corporations,  Reports  on  the 
Petroleum  Industrj/,  the  Tobacco  hidustry,  the  Steel 
Iniwtrtj  (Part  I),,  and  the  Lundwr  Industry. 

I'nitcd  States  Fcileial  Tiade  Conmiission,  Reports  on  the 
followirg  industries  are  helpful:  Anthracite  and  Bitum- 
inous Coal,  Coal  (Pennsylvania  Bituniinous),  Beet 
Sugar  Industry,  Book  Paper,  Copper,  Commercial  Wheat 
Flour  Milling,  Flour  Milling  and  Jobbing,  Farm  Operat- 
ing Equipment  Leather  and  Shoe  Industry,  the  Meat 
Packing  Industry  (particularly  Part  V,  1920),  News 
Print  Paper  Industry,  Sugar  Supply  and  Prices. 

United  States  Fuel  Administration,  Report  of  the  Engineers^ 
Committee,  1918-1.919.  Washington,  Government  Print- 
ing Office,  1919. 

Uiuted  States  Tariff  Board,  Reports  on  the  Pulp  and  Paper 
Industry,  and  Wool  and  Cotton  Manufactures.  Wash- 
ington, Government  Printing  Office,  191L  1912. 

Ur.ited  States  Tariff  Conmiission,  Co.sts  of  Production  in  the 
Dye  Industry,  191S-1919.  W^ashington,  Government 
Printing  Of!  ce,  1920.  (Also,  Cas/.s  of  Production  in  the 
Sugar  Imhistry.) 

United  States,  War  Industries  Board.  (A  mass  of  useful 
financial  and  cost  data  was  collected  by  the  W^ar 
Industiies  Boaid  to  serve  as  a  basis  for  price  fixing  and 
Govei-nment  regulation  during  the  war.  Some  of  this 
data  is  now  available  in  vai'ious  Governnxn^t  depart- 
ments, though  a  large  pait  of  it  is  filed  away  in  W^ash- 
ington  and  is  apparently  inaccessible.) 

V.\N  HiSE,  C.  R.,  Coticentration  and  Control  (Revised  ecHtion). 
New  York,  The  Macmillan  Company,  1914. 


xlvi  PROBLEMS  IX  BUSINESS  FINANCE 

*Wall,  Alexander,  Crerlil  Barotnetrics  (published  in  the 
Federal  Reserve  Bulletin  for  Mareh,  1919  and  also 
privately  eireulated  as  a  monograph.) 

*WooLEY,  0.  L.,  The  Financimj  of  Cotton,  Bulletin  of  the 
Robert  Morris  Assoeiates,  July  1920. 

Some  of  the  references  under  Topic  VI.,  F'inaneial  Aspects 
of  Producing  (ioods,  aie  closely  related  and  will  be  helpful. 
A  number  of  interesting  studies  on  the  subject  of  "Financial 
Standards"  and  the  financial  results  of  "Size"  have  been 
made,  under  the  author's  direction,  by  second-year  students 
in  the  Harvard  University  Graduate  School  of  Business 
Administration  for  their  graduating  theses. 

X.     Financial  Involvements,  Adjustments, 

Receiverships,  Bankruptcies, 

Reorganizations,  Etc. 

Dewing,  A.  S.,  Corporate  Promotions  and  Reorganizations. 
Cambridge.  Harvard  University  Press,  1914. 

*Dewing,  a.  S.,  Financial  Policy  of  Corporations,  Vol.  V., 
"Failure  and  Reorganization." 

Gerstenberg,  C.  W.,  The  Law  of  Bankruptcy.  New  York, 
Prentice-Hall  Compan}^  1917.  (The  problems  pre- 
sented in  Pai't  IV,  together  with  the  answers  to  these 
problems  published  in  a  separate  pamphlet,  are  partic- 
ularly helpful.) 

*LouGH,  W.  H.,  Business  Finance,  Part  V.  New  York, 
The  Ronald  Press  Company,  1917.  (Also,  Corpora- 
tion Finance,  394-443.) 

Lyon,  Hastings,  Corporation  Finance,  Part  II,  220-307. 
Boston,  Houghton  Mifflin  Company,  1916. 

*Mead,  E.  S.,  Corporation  Finance,  Chaps.  XXX-XXXII. 
New  York,  D.  Appleton  and  Company,  1920. 

There  are  also  helpful  chapters  dealing  with  these  problems 
in  other  general  books  listed  under  Topics  I  and  II.  In 
the  various  books  on  the  subject  of  Credit,  listed  under 
Topic  VII,  Financial  Aspects  of  Selling  Goods,  will  be  found 
helpful  chapters.  Particular  reference  may  be  made  to  the 
following: 

Blanton,  B.  H.,  Credit,  Its  Principles  and  Practice,  pp. 
170-228. 


BIBLIOGRAPHY  xlvii 

*Ettinger  and  Golif:b,  Credit'^  and  Collections,  pp.  307-357. 

*Hagerty,  J.  E.,  Mercantile  Credit,  pp,  247-377. 

*Meyer,    C    a.,    Mercantile    Credits    and    Collections,    pp. 
141-163,  and  pp.  179-254. 

Mercantile  Credits ,  pj).  196-245.  The  Ronald  Press  Company. 

XI.     The  Relation  of  Legislation  to 
Industrial  Finance 

*  American  Economic  Association,  Report  of  the  Committee  on 
War  Finance.     March,  1919  (Supplement.) 

Baruch,  B.  M.,  American  Industries  in  the  War,  (Report  of 
the  War  Industries  Board.)  Washington,  Government 
Printing  Office,  1921. 

*BuRTON,  T.  E.,  Corporations  and  the  State.     New  York,  D. 
Appleton  and  Company,  1911. 

Clabaugh,  William,  Income  and  Profits  Taxes  (A  series  of 
lectures  delivered  before  the  Y.  M.  C.  A.)  New  York, 
The  Association  Press,  1920.  (The  questions  and 
problems  contained  in  the  Appendix,  pp.  261-334,  are 
in  places  useful.) 

*Davies,  J.  E.,  Tru.st  Laws  and  Unfair  Competition.     Wash- 
ington, Government  Printing  Office,  1915. 

Elliot,  J.  M.,  Annotated  Blue-Sky  Laws  of  the  U.  S.,  Cin- 
cinnati, The  Anderson  Company,  1921. 

Haig,  R.  M.,  The  Taxation  of  Excess  Profits  in  Great  Britain. 
American  Economic  Review,  Supplement,  December, 
1920. 

Holmes,  G.  E.,  Federal  Income  and  Profits  Tax.  Indiana- 
polis, Bobbs-Merrill  Company,  1920  (with  Supplement 
for  1921.)  . 

*JoNES,   Eliot,   The   Trust  Problem    in   the    United  States. 
New  York,  The  Macmillan  Company,  1921. 

Litman,  S.,  Prices  and  Price  Control  in  Great  Britain  and  the 
United  States  During  the  War.  New  York,  Oxford 
University  Press,  1920.  (Published  for  the  Carnegie 
Endowment  for  International  Peace.) 

Montgomery,  R.  H.,  Income  Tax  Procedure,  192L  New 
York,  The  Ronald  Press  Company. 


xlviii       PROBLEMS  IN  BUSINESS  FINANCE 

MoxTfiOMEUV,  H.  H.,  Excess  Profits  Tax  Procedure,  1921. 
Now  Voik,  Tlio  Ronald  Press  Company. 

Orth,  S.  p.  (editor),  The  Relation  of  (iovernmeut  to  Prop- 
erty and  Indasfri/.     Boston,  Clinn  and  Company,  1915, 

Ripley,  A\'.  Z.,    Trusts,   Pools  and  Corporations   (Revised 
edition.)     Boston,  Ginn  and  Company,  1916. 

Stevens,  W.  S.  (etlitor),  Industrial  ('oinbinationsond  Trusts. 
New  York,  The  Maemillan  Company,  1914. 

Ftevens,   W.   H.   S.,    Unfair   Competition.     Cliicago,  The 
University  of  Ch.c:ij2;o  Press,  1917. 

U.  S.  Federal  Trade  Connnission,  Decisioiis,  Vols.  I  and  II. 
Washington,  (lovcM-mnent  Printing;  Offiee,  1920. 

Various  repoi-ts  of  the  United  States  Connnissioner  of 
Corporations  and  of  the  Federal  Tiade  Commission,  some 
of  which  have  heen  already  referred  to,  are  hclpfid  in  this 
cotmection.  The  student  may  also  refer  to  some  of  the 
titles  listed  under  Topic  II. 


XII.     Suggestions  Regarding  Current 
Material  of  Various  Sorts 

A.       FINANCIAL    PERIODICALS 

Acceptance  Bulletin   (Published  monthly  by  the  American 
Acceptance  Council,  New  York.) 

The  Annalist  (Weekly,  New  York,  Times  Publishing  Com- 
pany.) 

Banker's  Magazine. 

Banker  and  Tradesman. 

Bulletin  of  the  Investment  Bankers'  Association   (Published 
by  the  Association,  Chicago.) 

*Comniercial  and  Financial  Chronicle   (Weekly,  with  many 
supplements.) 

The  Credit  Monthly  {FovmevW  the  Bulletin  of  the  National 
Association  of  Credit  Men.) 

Dun's  Review  (The  Annual  numbers  are  particularly  helpful.) 

*Federal  Reserve  Bulletin  (Published  monthly  by  the  Federal 
Reserve  Board,  Washington.) 


BIBLIOGRAPHY  xlix 

Journal  of  the  Anurican  fnstilutr  of  Hankinij. 

Journol  of  Accoinittnicij. 

Moidhhl  Review  of  Credil  and  liusiness  Conih'fion^  (Puhlishod 
l)v  the  Fcdoial  Rt^-sorvo  Bank,  Now  York.) 

Economic  Con  iiti:>n^,  (iovertnnvnl  Fi/rtnce,  (ind  United  States 
Seciiritie''i  (Pablisli-d  nioithly  l)y  thn  National  City 
Bank  of  New  York.) 

B.       PERIODICALS    WITH    USEFUL    ARTICLE -1 

*Adniinif<tration    (Pu')li-;luHl    ni:)ntliiy,    beginning    January, 
1921,  by  tho  Ronald  Pioss  Company.) 

Business  Organization  and  Manaijcinent  (Lo:uion,  Sir  Isaac 
Pitman  k  Sons.) 

Factory  (Monthly,  A.  W.  Shaw  Conipany.) 

Forbes  Magazine  (Bi-wcckiy .) 

Industrial  Manag< nienl  (Monthly.) 

Journal  of  Political  Fcononi.y  (Published  monthly  by  the 
Klcononiics  Department  of  ChicMoo  University.) 

Magazine  of  Wall  Street. 

Monthly  Labor  Review.  United  States  Bureau  of  Labor 
Statistics,   Washington. 

Pri7iters  Ink  (Weekly.) 

*System  (Published  moj.thly  by  t'.ie  A.  W.  Shaw  Company.) 

C.     financial  and  business  dailies 

Boston  A^ews  Burea}i. 

Dailt/  News  Record  (New  York.) 

Journal  of  Commerce  (New  York.) 

New  York  Connnercial. 

Wall  Street  Journal. 

The  financial  and  industiial  pages  of  such  newspapers  as 
the  Boston  Transcript,  the  New  York  Times,  the  New  York 
Evening  Post,  and  the  Chicago  Tribune  are  particularly  help- 
ful. 


1  PROBLEMS  IX  BUSINESS  FINANCE 

D.       MANUALS,    STATISTICAL   SERVICES,   AND 
MISCELLANEOUS 

Massachusetts,  Abstract  of  the  Certificates  of  Corporations: 
Public  Document  No.  10  (Annual.) 

Massachusetts,  Statistics  of  Manufactiures:  Public  Document 
No.  36  (Annual.) 

Moody's  and  Poor's  Manual  of  Industrial  Securities. 

Moody's  and  Poor's  Analyses  of  Industrial  Securities. 

Review  of  Econoynic  Statistics  (Published  monthly  by  the 
Harvard  University  Committee  on  Economic  Research.) 

Standard  Corporation  Service  (The  Daily  and  Cumulative 
reports  are  invaluable,  and  the  "Manual  of  Unlisted 
Securities  is  also  helpful.) 

Standard  Daily  Trade  Service. 

United  States,  Abstract  of  the  Census  of  Manufactures,  1914, 
as  well  as  volumes  dealing  with  Manufactures  at  the 
Decennial  Census  periods,  contains  some  useful  material. 

United  States,  Statistical  Abstract  (Published  annually  by  the 
Bureau  of  Foreign  and  Domestic  Commerce) . 

The  various  Trade  Directories  such  as  Bennett's  Hand 
Book  of  Textile  Securities,  Davidson's  Textile  ''Blue  Book," 
Lockwood's  Directory  of  the  Paper,  Stationary  and  Allied 
Trades,  the  National  Iron  and  Steel  Blue  Book,  the  Official 
Textile  Directory,  and  Thomas'  Directory  of  Manufacturers, 
or  Hendrick's  Commercial  Register  of  the  United  States,  may 
help  the  student  in  some  of  his  investigations. 

Many  of  the  Trade  Associations  collect  financial  data  from 
their  members  to  which  it  is  sometimes  possible  for  the 
student  to  gain  access.  Material  collected  by  the  various 
Cedit  Reporting  Agencies  is  also  helpful. 


PART  I 
INTRODUCTORY 


NOTE  TO  TEACHERS,  STUDENTS,  AND 
THE  GENERAL  READER 

IN  the  problems  which  follow,  an  attempt  has  been 
made  to  include  all  the  detail  which  may  be  essen- 
tial to  an  intelligent  class-room  discussion.  It  is 
assumed,  however,  that  in  addition  to  reading  the 
Introductory  Chapter,  the  student  will  have  secured, 
either  through  his  own  outside  reading  or  from  a  few 
informal  lectures  by  the  instructor,  an  understand- 
ing of  the  commoner  terms  used  and  a  general  knowl- 
edge of  the  principles  of  Business  Finance.  For  those 
students  who  have  never  had  a  general  course  in 
finance,  the  writer  has  found  it  helpful,  as  a  preliminary, 
to  require  the  rapid  reading  of  such  a  text-book  as 
Lough's  ''Business  Finance." 

A  working  knowledge  of  accounting  is  also  practically 
essential  to  the  most  intelligent  handling  of  the  prob- 
lems. This  book,  can,  accordingly,  be  used  with  most 
profit  by  those  who  have  had  an  elementary  course  in 
accounting,  though  here  again  the  individual  teacher 
can  l^imself  fill  any  gap  in  the  student's  preparation, 
if  he  has  the  time  and  inclination  to  do  so.  Mention 
has  already  been  made  in  the  Bibliographical  Note  on 
page  XXXV  of  some  of  the  more  useful  texts  on  the 
subject  of  accounting. 

The  teacher  himself  should  find  it  helpful  to  make 
extensive  use  of  the  bibliography  given.  It  should  be 
stated,  however,  that  on  many  of  the  problems  pre- 
sented there  is  no  published  material  which  will  prove 
particularly  helpful.  In  such  cases,  enough  informa- 
tion is  given  in  the  problem  itself  to  enable  a  satisfac- 
tory answer  to  be  arrived  at  by  common  sense. 

In  addition  to  the  preliminary  preparation  which 
has  been  mentioned  as  being  highly  desirable  on  the 


4  PROBLEMS  IN  BISINESS  FINANCE 

part  of  the  student,  he  would  also  do  well  to  consult 
some  of  the  readings  listed  at  the  beginning  of  each 
chapter.  These  will  frequently  give  the  key  to  prob- 
lems which  follow.  Occasionally,  also,  a  special  refer- 
ence is  appended  to  the  individual  questions,  for  the 
student's  guidance  and  information,  rather  than  be- 
cause such  reference  is  absolutely  necessary  to  a  cor- 
rect solution  of  the  problem.  The  student  will  occa- 
sionally find  it  helpful  to  glance  at  the  statistical 
material  in  the  Appendix,  much  of  which  is  wholly 
new.  Some  teachers,  also,  may  find  it  desirable  from 
time  to  time  to  preface  their  class-room  discussions  of 
the  various  topics  by  a  brief  preliminary  survey. 

So  far  as  the  problems  themseh'es  are  concerned,  the 
author  has  endeavored  to  arrange  them  in  such  an  order 
that  the  subject  can  be  logically  developed.  It  should, 
however,  be  very  helpful  to  the  reader  to  consult  the 
general  outline  above  given,  in  order  to  get  a  preliminary 
view  of  the  general  relations  of  the  topics  to  be  presented. 
In  many  instances,  also,  it  must  be  admitted  that  the 
arrangement  of  the  problems  can  be  reduced  to  no 
logical  scheme,  inasmuch  as  there  are  many  natural 
overlappings  of  the  subject.  Some  instructors,  there- 
fore, may  not  care  to  follow  the  author's  order  in  all  cases. 

The  aim  of  the  problems  has  been  to  present  actual 
financial  situations  in  different  lines  of  business  as  they 
arise.  Hence,  many  different  types  have  been  used. 
Sometimes  the  problem  conveys  its  own  solution,  and 
the  student's  judgment  is  tested  by  critically  analyzing 
this  solution  or  by  attempting  to  discover  a  desirable  or 
possible  alternative.  At  other  times,  two  or  more  alter- 
native courses  are  open,  and  the  student  is  asked  to 
choose  that  solution  which  seems  best.  Frequently,  al- 
so, the  problem  is  so  stated  as  to  test  the  student's  abil- 
ity to  think  comparatively  and  to  reason  analogically. 
Again,  in  certain  problems  the  student  may  be  led  into 
a  seeming  cul  de  sac  and  asked  to  find  the  way  out. 

In  majiy  cases,  solutions  have  not  yet  been  reached 
by  the  business  men  who  have  given  the  problems. 
This  fact  should  add  considerable  zest  to  the  discussion. 


NOTE  TO  TEACHERS  5 

For  problems  of  this  type,  also,  there  is  frequently  no 
one  correct  solution.  The  answer  may  be  largely  a  mat- 
ter of  personal  judgment.  In  all  such  cases,  however, 
the  student  should  be  vigorously  pressed  to  defend 
his  position. 

It  should  further  be  noted  that  in  many  of  the  prob- 
lems the  proper  solution  hinges  on  some  small  point 
which  at  first  glance  may  be  wholly  overlooked  by  the 
student,  or  at  any  rate  may  seem  relatively  unim- 
portant. A  very  slight  change  in  a  business  situation 
frequently  leads  to  momentous  consequences — a  fact 
which  cannot  be  too  strongly  impressed  upon  the  reader. 

In  order  to  facilitate  the  student's  preparation,  as 
well  as  the  class-room  discussions,  numbered  questions 
stressing  the  more  important  points  have  been  appended 
to  each  problem.  These  questions  are  merely  meant 
to  be  suggestive,  not  exhaustive.  Teachers  can  follow 
them  or  not  as  they  see  fit.  In  the  author's  own  ex- 
perience, also,  it  had  proved  very  useful  to  make  fre- 
quent summaries  of  the  various  points  discussed  in  the 
separate  problems,  as  well  as  to  give  more  general  sum- 
maries at  the  conclusion  of  the  discussion  of  the  dif- 
ferent divisions  of  the  subject. 

In  the  discussion  of  the  problems,  teachers  may 
find  it  desirable  to  have  the  main  points  at  issue 
summed  up  by  a  student  prior  to  the  general  discus- 
sion, as  s  customariy  required  in  those  law  schools 
where  the  case  method  is  used.  This  exerc  se  will  aid 
in  developing  power  of  ana^sis  and  terseness  in  expres- 
sion, and  will  insure  ful  preparation  on  the  part  of 
the  student.  As  a  matter  of  course  the  student's 
text  shou  d  a  ways  be  brought  to  the  class-room,  so 
that  he  can  constant  y  follow  the  development  of  the 
various  problems  and  jot  down  important  memoranda. 

Some  teachers  will  probably  find  it  advantageous  to 
require  a  certain  amount  of  written  work  from  the 
student,  either  in  the  nature  of  class-room  tests  or 
occasional  reports.  The  author  would  suggest  that 
brief  class-room  tests  on  outside  reading,  assigned  as 
a  preparation  for  the  problem  discussion,  will  in  many 
cases  prove  extremely  valuable,   especially  for   those 


6  PROBLEMS  IN  BUSINESS  FINANCE 

students  who  have  had  no  previous  preparation  in 
finance.  The  Exercises  preceding  some  of  the  chapters 
will  also  be  helpful  as  outside  reports,  which  will  give 
the  student  a  better  understanding  of  many  of  the  prob- 
lems. Occasionally,  it  may  be  worth  while  to  require 
written  solutions  of  the  problems  themselves. 

The  material  in  this  book  is  ample  for  a  full  year's 
course,  though  by  making  the  proper  selection  it  can 
readily  be  adapted  to  a  half-year's  course.  The  author 
himself  uses  it  for  a  half-course  in  Industrial  Finance 
with  students  in  the  Harvard  Graduate  School  of  Busi- 
ness Administration.  Depending  upon  the  nature  of 
other  required  courses,  some  teachers  may  wish  to  omit 
certain  problems,  topics,  or  even  chapters.  Such 
omissions  can  be  judiciously  made  without  in  any  way 
breaking  up  the  continuity  of  the  whole.  To  the 
author's  knowledge,  no  other  book  or  collection  of 
books  attempts  to  cover  the  vital  phases  of  Business 
Finance  from  the  same  angle  or  in  so  comprehensive  a 
manner  as  the  present  volume.  Hence,  even  if  a  text- 
book is  being  regularly  used,  this  book  should  prove 
useful  as  required  collateral  reading. 

Finally,  it  should  be  stated  that,  while  there  is  really 
no  mystery  connected  with  the  subject  of  finance,  as  is 
sometimes  supposed,  yet  many  apparently  simple  prob- 
lems are  far  more  significant  than  may  at  first  appear. 
Practically  every  one  of  the  topics  developed  and 
problems  presented  has  been  carefully  discussed  with 
well-known  business  men  and  bankers  of  New  York, 
Boston,  or  elsewhere.  The  keen  interest  which  such 
men,  after  many  years  of  outstanding  financial  success, 
have  taken  in  every  aspect  of  the  work,  leads  to  the 
conclusion  that  the  more  intensive  is  the  business 
equipment  and  experience  of  the  reader,  the  more  good 
he  will  probably  get  out  of  a  perusal  of  the  following 
problems.  Accordingly,  the  author  is  emboldened  to 
hope  that  many  men  actively  engaged  in  the  financial 
conduct  of  industry  will  find  within  the  covers  of  this 
book  material  which  will  be  of  interest  to  them. 


CHAPTER  I 

INTRODUCTION— GENERAL  SURVEY 
OF  THE  FIELD 

WHEN  Henry  Ford  was  reported  to  be  in  finan- 
cial difficulties  early  in  1921,  and  when  it  was 
thought  that  he  needed  new  financing  to  the 
extent  of  $75,000,000  or  more,  many  of  the  "wise  ones" 
said,  "What  a  fool!  This  is  an  example  of  the  evils 
resulting  from  one-man  control  in  industry.  Ford 
has  ignored  banking  and  finance  and  now  the  bankers 
will  have  a  few  things  to  say  to  him  when  he  comes 
with  hat  in  hand  seeking  their  assistance."  In  fact, 
one  banker  is  reported  to  have  gone  so  far  as  to  pay 
Mr.  Ford  a  special  visit  in  order  to  suggest  to  him  who 
the  treasurer  of  his  refinanced  organization  should  be. 
Within  a  few  weeks,  however,  Ford  himself  announced 
that  he  was  not  seeking  any  financial  assistance,  and, 
further,  that  if  he  should  wish  to  arrange  for  credit 
he  would  do  so  at  a  time  when  he  did  not  need  the  help. 
Three  or  four  months  after  this  announcement  by 
Mr.  Ford,  the  same  "wise  ones"  were  almost  fulsome 
in  their  praise  of  Ford's  financial  skill  because  he  had 
managed  to  "turn  the  corner"  without  any  outside 
assistance.  His  example  was  referred  to  as  one  of  the 
most  inspiring  instances  on  record  of  what  one  man's 
ability  and  determination  can  accomplish  in  troubled 
times  like  these. 

Probably  neither  of  these  extreme  assertions  regard- 
ing Mr.  Ford  are  wholly  correct.  Yet  it  may  be  that 
in  the  long  run  some  of  the  policies  recently  adopted  by 
Mr.  Ford,  which  have  been  the  subject  of  much  criti- 
cism, may  lead  to  his  financial  undoing.  Nevertheless, 
the  fact  that  he  so  successfully  weathered  the  storm 


8  PROBLEMS  IN  BUSINESS  FINANCE 

while  others  were  sinking,  suggests  that  his  past  finan- 
cial policies  and  the  financial  structure  of  his  organiza- 
tion were  preeminently  sound  and  worthy  of  study. 

At  the  very  time  when  the  largest  automobile  com- 
pany of  its  kind  in  the  world  was  coming  safely  through 
this  troubled  period,  the  w^orld's  largest  maker  of  rubber 
tires,  Mr.  Seiberling,  was  being  ousted  entirely  by  the 
Goodyear  Company's  creditors  from  the  control  of 
the  mammoth  organization  which  he  had  built  up  in 
twenty  years,  with  practically  no  original  capital. 
These  two  organizations  were  integral  parts  of  the 
same  great  industry.  They  began  in  much  the  same 
manner  and  both  were  preeminent  in  their  respective 
fields.  Why  did  Mr.  Ford  apparently  succeed,  and 
why  did  Mr.  Seiberling  fail?  The  causes  for  the 
difference  in  the  financial  position  in  which  these  two 
great  companies  find  themselves  at  the  middle  of  1921, 
can  be  readil}^  ascertained  and  merit  careful  study. 

During  the  first  six  months  of  the  present  year,  one 
of  the  great  commercial  agencies  reports  9,035  business 
failures  with  aggregate  liabilities  of  $310,671,000.  In 
amount  of  liabilities,  during  the  first  half  of  1921  the 
failures  have  been  about  60  per  cent  greater  than  in 
any  similar  period  in  our  history.  Many  a  hitherto 
"successful"  business  man  is  now"  being  forced  to 
reflect  on  the  underlying  causes  of  the  present  situation. 
During  the  long  upward  swing  of  prices  for  more  than 
twenty  years,  it  was  comparatively  easy  to  make 
money,  since  some  of  the  increasing  expenses  of  pro- 
duction always  tended  to  lag  behind  the  selling  price 
of  the  fini  shed  product.  During  the  period  of  rapidly 
rising  war-time  prices  manj^  a  concern  found  it  easier 
than  ever  to  be  "successful."  In  fact,  mere  upstarts  in 
business  were  disposed  to  regard  themselves  as  financial 
leviathans,  because  of  the  unprecedented  temporary 
profits  which  they  were  fortunate   enough  to  make. 

As  the  tide  of  business  prosperit  ^  is  waning,  however, 
it  becomes  apparent  to  the  though  tful  man  that  many 
of  the  present  financial  difficulties  a  re  due,  not  to  the 
catastrophes  wrought  by  the  Great  War  as  is  habitually 


INTRODUCTION— GENERAL  SURVEY  0 

asserted,  but  to  the  failure  of  business  concerns  them- 
selves to  "read  the  handwriting  on  the  wall,"  and 
to  follow  the  simple  rules  which  are  inseparable  from 
lasting  financial  success.  While  the  post-war  boom 
was  on,  it  was  easy  to  forget  that  there  is  a  Business 
Cycle,  that  very  definite  results  inevitably  follow 
certain  causes,  and  that  all  the  activities  of  a  business 
are  intimately  related  and  ultimately  have  a  profound 
effect  on  its  financial  condition. 

No  matter  how  apparently  prosperous  a  business 
may  have  been,  there  are  times  when  financial  difficul- 
ties cannot  possibly  be  avoided  unless  the  "rules  of 
the  game"  have  been  consistently  followed  from  the 
very  beginning.  Hence  it  is  at  this  time  decidedly 
worth  while  to  examine  the  financial  problems  which 
have  been  and  now  are  faced  by  typical  business 
concerns.  Thus  it  may  be  possible  to  discover  causes, 
account  for  results,  and  draw  certain  valid  conclusions, 
which  without  a  first-hand  study  would  seem  to  be 
little  more  than  academic  theorizing. 

Nor  is  it  desirable  for  present  purposes  to  center 
much  attention  on  the  larger  business  units.  Their 
financial  position  and  problems  are  frequently  not 
typical  and  are  usually  fairly  well-known.  Rather,  it 
would  seem  that  the  greater  benefit  can  be  derived 
from  a  study  of  the  problems  of  the  medium-sized 
and  smaller  industrial  concerns.  Those  businesses 
which  may  properly  be  designated  as  being  in  this 
classification,  in  1914  constituted  98.6  per  cent  of  the 
total  number  of  manufacturing  concerns  in  the  United 
States,  and  produced  more  than  52  per  cent  in  value  of 
product.*  In  addition  there  are  hterally  hundreds  of 
thousands  of  trading,  financial,  and  personal  service 
concerns  of  various  types,  most  of  which  are  unincor- 
porated. Accordingly  it  now  seems  desirable  to  devote 
attention  largely  to  the  daily  problems  of  this  numerous 

*A11  manufacturing  concerns  the  annual  value  of  whose  product  was 
less  than  $1,000,000  are  included  in  this  classification.  It  is  interesting 
to  note  that  87.7  per  cent  of  the  total  number  of  manufacturing  estab- 
Hshments  reported  to  the  United  States  Census  Bureau  in  1914  showed 
an  annual  value  of  product  less  than  $100,000. 


10  PROBLEMS  IN  BUSINESS  FINANCE 

group  of  smaller  businesses,  and  to  those  problems 
which  are  common  to  all  types  of  business  whether 
large  or  small. 

Since  most  books  on  the  general  subject  of  finance 
have  in  the  main  discussed  the  problems  of  so-called 
"corporation"  finance  and  "trust"  finance,  giving  a 
good  deal  of  attention  to  railroads  and  public  utilities,  it 
may  be  helpful  at  this  point  to  call  the  reader's  atten- 
tion briefly  to  some  of  the  outstanding  characteristics 
which  tend  to  make  many  phases  of  railroad  and  public 
utility  finance  different  from  industrial  finance. 

(1)  In  the  first  place,  it  may  be  noted  that  public 
service  corporations  of  all  sorts  must  secure  franchises 
from  public  bodies  to  enable  them  to  use  the  highways, 
and  the  like.  The  railways  in  particular  can  exer- 
cise the  right  of  eminent  domain.  (2)  This  of  course 
suggests  the  fact  that  local  public  utilities,  at  any 
rate,  are  as  a  rule  more  cheaply  and  conveniently 
carried  on  as  monopolies.  (3)  Further,  interesting 
problems  arise  because  of  the  fact  that  the  service 
furnished  by  utility  companies  and  railroads  must  be 
consumed  in  connection  with  the  plant  which  renders  it. 
Therefore,  the  question  of  the  distribution  of  product 
and  its  financing  is  a  far  different  one  from  that  which 
arises  in  the  case  of  industrial  concerns.  (4)  Probably, 
also,  on  account  of  the  nature  of  the  service  rendered 
by  public  utilities  and  particularly  by  railroads,  the 
economic  principal  of  "joint  cost"  is  more  in  evidence 
than  in  the  case  of  the  average  factory  operation. 
Hence  it  should  be  easier  to  determine  the  actual 
costs  of  a  manufactured  product  than  to  discover  the 
true  cost  of  a  given  service  rendered  by  a  transportation 
company.  (5)  It  is  also  significant  that  the  average 
industrial  concern  can  within  limits  change  the  nature 
of  its  product,  produce  side-lines,  or  engage  in  subsidi- 
ary or  by-product  operations,  all  of  which  activities 
are  practically  impossible  for  any  public  utility.  (6) 
The  average  industrial  concern  can  expand  its  plant 
with  considerable  ease  without  consulting  any  parties 


PUBLIC  UTILITY  FINANCE  11 

but  the  owners.  No  such  possibiUty  exists  in  the  case 
of  the  various  transportation  corporations.  (7)  After 
a  certain  point  has  been  reached  it  is  practically 
impossible  for  a  public  service  corporation  to  grow- 
larger,  inasmuch  as  it  is  already  serving  the  full  needs 
of  the  community.  For  industrial  concerns,  however, 
there  is  practically  unlimited  opportunity  for  growth 
in  some  new  direction. 

(8)  It  is  further  significant  that  in  the  public 
utilities  and  railroads  the  investment  is  high  relative 
to  the  annual  gross  income.  In  fact,  the  "gross"  is 
ordinarily  not  more  than  20  to  25  per  cent  of  the 
investment  and  frequently  much  lower.  In  manufac- 
turing concerns,  however,  the  proportion  of  gross 
income  to  investment  is  often  100  per  cent  or  more, 
and  in  the  case  of  those  trading  businesses  which  turn 
their  inventory  rapidly,  it  is  frequently  many  hundred 
per  cent.  (9)  Public  utilities  can,  as  a  rule,  count 
on  a  relatively  steady  income,  since  the  demand  for 
their  service  is  reasonably  constant.  This  condition 
holds  true  for  the  railroads  to  a  much  less  degree,  but 
for  many  manufacturing  concerns  the  income  is  very 
sporadic  and  uncertain,  and  the  demand  for  the  prod- 
uct cannot  readily  be  predicted.  (10)  Should  serious 
financial  difficulties  arise,  there  is  always  the  possibil- 
ity of  selling  the  plant  of  a  public  service  corpora- 
tion, for  its  services  are  needed  no  matter  what 
happens.  The  plant  of  an  industrial  concern,  on  the 
other  hand,  may  be  practically  worthless  under  a 
forced  sale  no  matter  how  carefully  constructed  that 
plant  may  be. 

On  account  of  the  conditions  indicated,  it  has  been 
possible  to  bring  the  finances  of  railroads  and  public 
utilities  to  a  reasonable  degree  of  standardization. 
Because  of  the  direct  public  interests  involved,  general 
public  regulation  of  public  service  corporations  has 
developed,  and  this  regulation  has  tended  to  bring 
about  an  even  higher  degree  of  standardization.  The 
finances  of  industrial  concerns,  on  the  contrary,  have 
hitherto  only  in  a  very  indefinite  sort  of  way  been  reg- 


12  PROBLEMS  IN  BUSINESS  FINANCE 

ulated  by  public  bodies.     The  latter  have  accordingly 
been  much  freer  in  their  methods  of  financing. 

Though  from  a  financial  point  of  view  there  are  very 
interesting  and  definite  contrasts  between  industrial 
concerns  and  public  service  corporations,  yet  it  must 
also  be  borne  in  mind  that  striking  differences  exist 
between  business  concerns  themselves.  In  fact,  an 
almost  endless  classification  might  be  made  on  the  basis 
of  the  type  of  organization,  the  nature  of  the  product, 
and  the  size  or  age  of  the  establishment.  Further, 
great  differences  of  much  financial  significance  exist 
between  those  concerns  which  produce  staples  and  those 
which  deal  only  in  specialties  or  novelties.  Again,  those 
concerns  engaged  in  seasonal  businesses  of  various 
sorts  are  in  an  entirely  different  position  from  the  ones 
which  turn  out  a  product  for  which  there  is  a  steady 
demand.  The  seasoned  type  can  also  be  readily 
distinguished  from  the  more  spectacular  kind  of  under- 
taking. The  concerns  which  are  engaged  in  manufac- 
ture may  be  set  off,  with  regard  to  their  financial 
problems,  from  the  trading  companies  or  the  organiza- 
tions which  merely  render  service,  such  as  the  bank- 
ing business,  amusement  companies,  and  so  on. 

Finally,  it  must  be  observed  that  even  in  the  same  line 
of  industry  there  has  not  hitherto  been  much  standard- 
ization, due  to  important  differences  in  location,  plant 
construction,  management,  and  the  like.  In  an  indus- 
trial concern,  therefore,  of  whatever  type  it  maybe,  the 
personal  faotoi:  tends  to  play  a  far  more  important  part 
than  iiTtHe  case  of  public  service  corporations.  Hence 
one  might  normally  expect  to  find  a  wide  variation  in 
the  financial  problems  of  industrial  concerns,  and  it  is 
easy  to  fall  into  the  error  of  thinking  that  the  principles 
of  finance  which  apply  in  one  case  will  have  little  or 
no  relation  to  another  case.  It  is  of  course  true  that, 
on  account  of  the  changes  in  the  general  business 
conditions,  what  is  apparently  good  financing  at  one 
time  may  be  very  bad  financing  at  another.  It  is 
further  true  that  the  financial  "set-up"  of  certain  types 


LAUNCHING  THE  ENTERPRISE  13 

of  industry  must  from  the  nature  of  their  operations 
differ  greatly.  Yet,  in  spite  of  these  apparently 
important  differences,  it  is  probable  that  the  funda- 
mental principles  of  sound  business  financing  can  be  re- 
duced to  a  comparatively  small  number  of  simple  rules. 
In  the  following  survey,  the  point  of  view  will  be  a 
conservative  one.  The  suggestions  made  are  meant 
merely  to  serve  as  a  guide  to  the  student  and  general 
reader.  There  are  no  absolutely  fixed  rules  of  finance; 
but  for  the  beginner  it  is  well  to  set  up  certain  ideals 
as  a  standard. 

Most  of  the  attempts  to  promote  new  enterprises 
"fizzle  out."  Yet,  in  spite  of  this  fact  it  appears  to  be 
comparatively  easy  to  raise  enough  money  to  launch 
any  kind  of  a  new  concern — as  evidenced  by  the 
Federal  Trade  Commission's  report  that  probably  half 
a  billion  dollars  was  recently  sunk  in  worthless  securities 
in  the  space  of  one  year  by  the  people  of  the  United 
States.  Even  for  those  whose  intentions  are  the  best, 
it  seems  to  be  easier  to  raise  capital  to  be  thrown  away 
than  to  decide  whether  there  is  any  financial  justifica- 
tion for  launching  the  new  concern.  Unless  there  is 
some  very  special  financial  advantage  connected  with 
a  new  concern  as  compared  with  others  in  the  same  line 
of  business,  such  as  the  ownership  of  a  "100  per  cent 
patent,"  which  will  confer  a  monoply  for  a  period  of 
time,  the  occupation  of  a  very  superior  location,  the 
certain  securing  of  lower  operating  expenses  through 
improved  methods  or  lower  construction  costs,  or 
something  of  the  sort,  it  is  very  doubtful  whether  there 
is  in  the  long  run  any  economic  reason  for  launching 
a  new  enterprise,  unless,  of  course,  there  should  be  a  ^ 
very  rapidly  growing  and  probably  continuous  demand 
for  the  commodity  produced. 

The  mere  fact  that  there  is  a  "market"  for  the  goods 
to  be  produced  does  not  in  itself  decide  that  a  given   ' 
concern  should  be  launched.     There  may  be  others, 
more  effective,  coming  into  the  field.     Even  granting 
that  all  other  conditions  are  favorable,  the  stage  of 


14  PROBLEMS  IN  BUSINESS  FINANCE 


th( 


ie  Business  Cycle  may  be  wrong  for  the  starting  of 
a  new  enterprise,  on  account  of  the  high  absolute  costs, 
and  the  possibility  of  a  depression  in  the  near  future.   / 

For  launching  a  concern  in  order  to  develop  an 
absolutely  new  idea,  after  the  other  logical  require- 
^  ments  are  met,  the  chief  question  is  that  of  demand 
)  for  the  commodity  to  be  produced  or  the  service  to  be 
I  rendered.  Man}'^  a  financial  miscarriage  has  resulted 
from  the  failure  to  realize  that  no  matter  how  admirable 
the  idea  or  how  secure  the  patent  rights,  and  the  like, 
the  public  may  have  no  use  for  the  new  commodity. 
Most  failures  which  result  ultimately  from  such  an 
unpropitious  beginning  are  an  economic  waste.  Yet, 
if  the  start  is  honestly  made,  is  it  not  possible  that  the 
lessons  taught  by  some  unfortunate  experience  of  this 
sort  serve  a  useful  purpose?  And  may  it  not  also  be 
true  that  the  possibility  of  such  easy  launching  of  new 
concerns  tends  to  foster  a  spirit  of  wholesome  compe- 
tition from  which  the  public  ultimately  gains? 

Assuming  honest  intentions  throughout,  it  may  be 
stated  with  regard  to  the  problem  of  securing  capital 
to  launch  a  new,   small   concern — and   all  successful 
concerns    have    small    beginnings — that    the    original 
'Tj  financing  should  be  done  largely  in  a  private  manner. 

Ownership  and  responsibility  for  the  outcome  should 
go  hand  in  hand.  Ordinarily,  outsiders  should  not  be 
expected  to  risk  their  money,  unless  the  proposition  is 
understood  by  them  to  be  a  largely  speculative  one, 
until  the  business  has  demonstrated  its  capacity  to 
earn  a  return  on  the  initial  investment.  In  most  cases 
the  beginning  should  be  modest,  with  the  minimum 
investment  in  fixed  assets.  Ample  provision,  how- 
ever, should  be  made  for  working  capital— a  caution 
^-^  usually  overlooked.     All  obligations  such  as  mortgages 

vy  should  whenever  possible  be  avoided.     If  the  unlimited 

risks  of  individual  ownership  or  partnership  are  to  be 
escaped,  there  may  be,  aside  from  tax  considerations, 
a  good  reason  for  incorporating.     In  the  long  run,  the 
/Tt^  J    safest  rule  is  for  an  industrial  corporation  to  finance 


? 


FINANCING  THE  DEVELOPMENT  15 

itself  solely  by  means  of  common  stock  issues.  Pre- 
ferred stock,  however,  is  frequently  used  as  a  temporary 
bait  to  call  forth  the  investment  of  those  who  are 
willing,  for  a  stipulated  low  return,  to  hold  the  financial 
bag,  while  the  common  stock  holders,  often  with  only 
a  negligible  original  investment  of  their  own,  but  with 
sole  control,  reap  all  the  rewards  which  come  from  the 
use  of  the  money  of  outsiders. 

As  a  rule,  the  strong  business  concern,  like  the 
strong  body,  grows  slowly,  financing  itself  out  of 
earnings  until  the  time  comes  when  the  reinvested 
earnings  cannot  be  made  to  yield  as  high  a  return  to 
the  owners  by  being  put  back  into  the  business  as  the 
owners  could  themselves  realize  by  investing  these 
earnings  in  some  other  manner.  Certainly  this  is  true 
of  a  closely  held  concern.  It  is  a  most  unwise  policy  ,.. — , 
for  any  company  to  expand  rapidly  with  a  view  to  ^/ 
securing  business  which  may  prove  only  temporary. 
The  earnings  may  be  high  for  a  time,  but  after  that 
the  deluge!  The  overhead  expenses  have  a  way  of 
holding  their  own  while  profits  shrink.  If  a  concern 
manages  to  grow  out  of  earnings,  and  no  permanent 
borrowing  is  necessary,  the  pressure  of  hard  times  will 
be  less  severe.  However  financed,  expansions  and 
developments  should  usually  be  made  only  at  the 
beginning  of  a  period  of  prosperity  or  during  a  lull, 
when  capital  costs  are  low. 

If  it  has  become  necessary  to  resort  to  public  financ- 
ing in  order  to  expand  and  develop,  the  easiest  terms 
are  usually  secured  by  that  concern  whose  past  financial 
history  is  sound.  If  a  public  offering  of  securities  is 
made  and  the  stock  listed  on  some  exchange,  the 
future  financing  of  the  company  will  probably  be  done 
partially  with  an  eye  to  the  stock  ticker.  In  view  of 
the  speculative  raids  on  listed  securities  and  the 
rumors  which  constantly  float  around,  it  seems  some- 
times that  the  concern  is  safest  whose  stock  is  unknown 
on  'change.  For  the  smaller  concerns,  however,  the 
problem  is  not  usually  a  serious  one,  since  their  market 
for  funds  is  only  local. 


16  PROBLEMS  IN  BUSINESS  FINANCE 

Another  important  feature  of  the  new  financing 
should  be  noted.  The_concern  seeking  new  funds 
must  watch  the  investment  ''fads."  Not  many  years 
ago  all  but  railway  and  public  utility  securities  were 
considered  speculative.  But  the  public  became  sadly 
disillusioned  in  this  matter  and  turned  to  industrials. 
Within  the  last  few  years  industrial  preferred  stock 
and  bonds  have  come  largely  into  the  ''investment 
market."  The  sentiment  has  swung  to  the  opposite 
point  of  the  compass.  But  this  is  not  the  whole  story. 
Four  or  five  years  ago  it  was  easy  to  sell  industrial 
preferred  stock  on  a  7  per  cent  basis,  without  noticeably 
stringent  protective  provisions.  Gradually  the  rate 
basis  grew  to  8  per  cent  or  more,  with  much  more 
drastic  protective  features.  Next,  the  public  called 
for  debenture  notes  instead  of  preferred  stock.  These 
at  first  were  notes  maturing  within  three  to  five  years. 
At  the  next  stage  ten  year  debentures  were  called  for, 
and  at  present  it  is  difficult  to  secure  capital  even  for 
working  purposes  without  issuing  first  mortgage  bonds ! 

Nor  does  the  story  end  here.  The  protective 
provisions  relating  particularly  to  sinking  fund  and 
redemption  requirements,  to  the  maintenence  of  a 
stated  ratio  of  current  assets  to  current  liabilities,  or 
to  keeping  the  net  current  assets  at  a  certain  fixed  and 
high  percentage  of  the  securities  outstanding,  have 
frequently  made  it  necessary  for  a  really  strong 
concern  to  refinance  under  great  difficulties  in  order 
to  abide  by  the  terms  of  its  indenture.  A  weak  concern 
may  often  be  made  even  weaker  by  these  provisions, 
which  are  meant  to  protect  the  securities  held,  but 
which  are  too  inflexible  for  the  financial  needs  of  the 
particular  business.  All  of  these  things  should  be  con- 
sidered by  the  business  which  publicly  seeks  new  capital. 

Furthermore,  obligations  incurred  in  order  to  finance 
an  abnormal  or  sudden  growth  should  be  self-liquidat- 
jn^  The  offixjers^^f  the-coacem  shoukLseeJJaeir  jvay 
out  before  they  get  in  too  deep.  This  rule  applies 
particularly  to  times  of  rapidly  rising  prices,  when 
securities   have   frequently   been   issued    for   working 


"GROWING  PAINS"  17 

capital  purposes.  Finall}^,  the  concern  should  always 
leave  open  some  satisfactory  alternative  method  of 
financing^^lust  as  strategy  demands  that  even  a 
victorious  army  assure  itself  of  a  line  of  retreat. 

Yet  the  average  business  concern  inclines  to  follow 
the  tide,  buy  its  capital  on  the  dear  market,  and  then 
sell  its  goods  a  little  later  on  the  cheap  market.  Many 
a  corporation  which  rushed  boldly  into  public  financing 
in  order  to  expand  and  "gobble  up"  war-time  profits,  is 
now  slinking  around  with  hat  in  hand,  begging  the 
bankers  or  the  small  investor  directly  to  take  their 
first  mortgage  bonds  at  an  almost  unthinkably  high 
rate.  It  is  really  pathetic  to  count  the  number  of  -^^ 
formerly  conservatively  financed  concerns,  which  j 
flashed  into  a  momentary  glory  during  the  war,  and  s 
which  will  probably  be  working  for  their  creditors  for  '-^ 
the  next  generation,  if  indeed  they  manage  to  avoid 
bankruptcy  in  the  near  future.  In  all  these  matters 
it  would  appear  to  be  a  generally  safe  rule  in  financing, 
as  on  the  stock  exchange,  to  do  about  the  opposite 
of  what  the  average  business  man  feels  hke  doing. 

In  connection  with  this  all-important  question,  one 
more  point  should  be  mentioned.  When  an  industrial 
concern  passes  through  the  adolescent  period  and 
emerges  into  a  good-sized  corporation,  two  mistakes 
are  commonly  made.  In  the  first  place,  the  cautions 
of  TtEeljearlier  years  tend  to  be  forgotten  and  the  9) 
energies  of  the  management  frequently  become  divided. 
The  day  of  small  things  is  too  often  despised — as  if 
'  the  fundamental  rules  for  success  are  any  different  for 
the  large  concern  than  for  the  small  one !  It  is  a  well 
,  recognized  American  business  trait  to  make  up  in  big- 
ness and  advertising  for  what  is  lacking  in  financial 
soundness.  _ 

Secondly,  many  concerns  grow  large  in  size  while  f^ /) 
their  officers  fail  to  grow  up  with  them.  They  continue 
to  think  and  act  in  small  terms  when  their  business 
demands  unusual  scope  and  vision,  which  can  result 
only  from  profound  study  of  the  situation,  combined 
with  great  natural  capacity.     To  attain  success,  the 


18  PROBLEMS  IN  BUSINESS  FINANCE 

growth  of  a  business  must  be  coordinated  in  all  its 
parts.  No  doubt  many  a  man  whose  business  has 
grown  too  big  for  him  looks  back  with  regrets  to  the 
earlier  years,  and  rightly  so,  for  his  grasp  is  loosening. 
It  requires  almost  more  than  eternal  vigilance  to  guide  a 
large  corporation  through  the  business  shoals  for  many 
years,  and  usually  only  one  hand  can  hold  the  rudder. 

That  small  concern  is  fortunate  indeed  which  starts 
with  an  adequate  supply  of  Working  Capital,  so  that  it 
will  not  need  to  look  for  further  assistance  until  it  has 
demonstrated  its  capacity  as  a  money-getter.  Even 
though  the  company's  own  funds  are  inadequate, 
arrangements  should,  if  possible,  be  made  to  take  the 
cash  discounts  on  purchases  rather  than  to  pay  what 
amounts  to  high  interest  rates  to  the  dealer.  Hence  re- 
sort should  be  made  to  the  bank,  and  requests  for  loans 
should  be  accompanied  with  a,full  statement  of  condi-_ 
tion  and  information  regarding  the  purpose  of  the  loan. 
Many  a  struggling  concern  has  grown  powerful  as  a  re- 
sult of  the  disinterested  guidance  of  a  friendly  banker. 

The  small  business  man  does  not  as  a  rule  sufficiently 
realize  the  banker's  function.  He  either  goes  in  fear 
and  trembling,  dreading  lest  he  be  swindled,  extermi- 
nated, or  devoured  by  the  unscrupulous  banker,  and  en- 
deavoring to  conceal  all  information  regarding  his  busi- 
ness which  might  "incriminate"  him,  or,  on  the  other 
hand,  he  rather  arrogantly  demands  that  the  bank  make 
wholly  unwarranted  and  even  unnecessary  commercial 
loans,  frequently  on  no  better  security  than  his  fixed 
assets!  This  lack  of  understanding  of  the  bank's  true 
function  is  partially  accounted  for  by  the  attitude  of 
the  banks  themselves.  They  have  frequently  failed  to 
acquaint  themselves  with  the  nature  of  their  client's 
business,  and  have  sometimes  not  cared  to  be  bothered 
with  the  smaller  accounts. 

In  general,  however,  the  great  competition  in  banking 
in  the  United  States  has  led  to  a  particular  cultivation 
of  the  small  borrower.  In  fact,  credit  has  probably 
been  far  too  easy  in  this  country.     We  have  reaped 


THE  BUSINESS  AND  THE  BANK  19 

the  results  in  rapid  growth,  accompanied  by  numerous 
failures.  Again,  c_ompetition  in  banking  has  made  it 
possible  for  many  a  stronger  concern  to  ignore  its 
bank  and  refuse  to  give  the  information  regarding  its 
financial  condition,  which  is  essential  to  intelligent 
credit  granting. 

Though  there  is  much  loose  talking  about  banker  con- 
trol of  industry,  this  criticism  cannot  properly  be  direct- 
ed against  the  average  commercial  bank.  If  a  customer 
is  frank  with  his  bank,  and  lives  up  to  the  requirements, 
he  can  usually  get  any  service  within  reason.  Invest- 
ment bankers  sometimes  insist  that  they  be  represented 
on  the  directorate  of  companies  which  they  have  helped 
finance — frequently  to  the  discomfort  of  the  original 
owners,  who  now  have  to  work  to  pay  off  their  debts. 
A  concern  which  does  not  fancy  financial  control  of  this 
sort  will  do  well  to  keep  its  house  in  order  and  to  walk 
humbly  in  the  days  of  its  prosperity. 

There  yet  remains  a  vast  field,  as  yet  little  cultivated, 
for  the  development  of  financial  cooperation  between 
banks  and  industries.  The  banks  have  not  made 
sufficient  use  in  an  analytical  way  of  the  invaluable 
material  in  their  possession.  Nor  have  they  until 
recently  secured  detailed  statements  of  condition  with 
sufficient  frequency  from  their  clients.  There  has  been 
too  much  guessing  on  the  part  of  the  lender  and  borrow- 
__er.  It  should  be  the  banker's  function  to  obtain  more 
information  and  carefully  to  analyze  and  interpret  the 
-data  in  his  possession.  Thus  by  making  a  dynamic  study 
of  the  credit  situation  in  the  different  types  of  industry, 
and  by  reducing  the  results  to  approximate  financial 
standards,  it  might  be  possible  to  give  such  constructive 
financial  advice  to  business  men  as  would  enable  them 
to  avoid  many  of  the  pitfalls  into  which  they  now 
tumble  through  a  failure  to  conduct  their  operations 
with  a  view  to  the  current  trends  in  business  conditions. 

All  economic  laws  are  but  approximations.  No 
rigid  rules  can  be  laid  down.  To  base  credit  granting 
solely  on  statistical  standards  is  as  unsafe  as  to  make 
only  character  and  capacity  the  criterions.     Yet  the 


20  PROBLEMS  IN  BUSINESS  FINANCE 

statistics,  when  properly  interpreted,  no  doubt  usually 
reflect  the  character  and  capacity  of  a  concern's  officers 
in  a  rather  intimate  way.  The  fact  that  we  still  have 
so  many  business  calamities,  so  many  peaks  and  valleys 
in  our  Business  Cycle,  shows  that  there  is  some  "malad- 
justment" somewhere  which  probably  can  be  remedied 
when  the  causes  are  sufficiently  understood.  It  would 
seem  that  the  banks,  through  a  more  careful  study, 
and  through  greater  cooperation  with  each  other  and 
with  industrial  concerns,  might  give  constructive 
advice  and  force  compliance  with  this  advice  on  the 
part  of  the  borrowers,  in  time  to  prevent  many  a  catas- 
trophe. Thus  the  curves  of  the  Business  Cycle  might 
gradually  be  somewhat  flattened  out,  much  to  the 
financial  gain  of  the  business  concerns  themselves,  the 
banks,  and  the  community  at  large. 

Finally,  it  cannot  be  stressed  too  strongly  that  the 
average  concern  tries  to  do  too  much  business  on 
credit.  Many  a  business  has  failed  and  many  a  bank 
has  lost  money,  because  temporary  borrowings  have 
been  used  for  investment  purposes.  This  situation 
might  be  avoided  if  the  bankers  would  insist  that  their 
customers  pay  off  all  loans  at  least  once  each  year. 
This  rule  is  not  ordinarily  observed,  except  by  the 
very  small  concerns  which  are  not  large  enough  or 
"shrewd"  enough  to  use  the  open  market  or  some  other 
bank  as  an  alternative  source  of  funds.  Some  bor- 
rowers make  it  a  practice  to  flit  in  and  out,  from  bank 
to  bank,  or  from  bank  to  open  market  and  back  again, 
and  then  to  call  it  "cleaning  up"  the  loans!  This 
practice  simply  means  a  lack  of  permanent  working 
capital  on  the  part  of  the  borrowing  concern,  with  the 
many  attendant  dangers. 

The  Commercial  Paper  Market  is  not  for  the  small 
borrower.  Many  medium-sized  concerns,  however, 
resort  to  borrowing  through  note  brokers  in  order  to 
secure  temporarily  lower  rates  of  interest  and  to  avoid 
keeping  the  usual  deposits  required  by  their  banks. 
The  open  market  is  useful  in  the  case  of  large  concerns 
whose    banks    cannot,    according    to   law,  lend  them 


OPEN  MARKET  BORROWING  21 

enough  money,  and  which  do  not  care  to  maintain 
adequate  deposit  requirements  in  a  large  number  of 
separate  banks.  But  for  the  smaller  company  the 
open  market  appears  to  have  few  advantages.  These 
little  fellows  tend  to  use  the  note  broker  as  a  com- 
petitor of  the  bank  instead  of  as  a  useful  adjunct. 
Usually  they  neglect  to  live  up  to  the  bank's  deposit 
requirements,  and  then  when  the  market  suddenly 
closes  on  them  they  are  in  a  dangerous  position.  All 
lines  should  be  kept  open  as  long  as  possible. 

Further,  a  concern  selling  its  paper  on  the  open 
market  is  subject  to  much  investigation  and  gossip 
which  very  frequently  works  injury.  Finally,  the 
small  interior  banks,  which  in  recent  years  have 
absorbed  great  quantities  of  commercial  paper,  act 
pretty  much  like  sheep.  They  buy  some  paper  which 
is  really  far  from  "prime"  because  they  "know"  the 
name  of  the  borrower  or  the  issuing  concern.  They 
turn  against  or  refuse  other  paper  of  a  much  higher 
grade  because  the  name  is  not  so  well  known  or  because 
of  prejudice  arising  from  unfounded  rumors.  For 
example,  if  the  paper  of  a  concern  in  one  line  of  industry 
goes  bad,  there  is  a  tendency  to  avoid  all  paper  put  out 
by  any  concerns  engaged  in  this  particular  industry. 
Beyond  a  doubt  that  company  rests  easiest  which  does 
not  need  to  reckon  with  situations  such  as  these. 

Many  enthusiastic  claims  have  been  made  for  the 
Trade  Acceptance  as  a  method  of  financing  for  working 
capital.  Some  have  gone  so  far  as  to  say  that  the 
working  capital  of  a  concern  would  be  doubled  if  the 
trade  acceptance  were  used  on  all  accounts,  since  these 
acceptances  could  be  discounted.  The  obvious  reply 
to  this  line  of  argument  is  that  if  a  firm's  collection  of 
customer's  accounts  is  prompt,  a  bank  will  lend  to 
the  limit  on  the  current  ratio.  Trade  acceptances  in 
such  cases  are  not  needed  to  improve  the  quality  of  a 
concern's  receivables.  If,  on  the  other  hand,  accounts 
receivable  are  customarily  slow,  the  acceptances  may 
be  used  to  make  payments  more  certain.  Trade 
acceptances  arising  in  this  manner,  however,  might  not 


J 


c 


22  PROBLEMS  IN  BUSINESS  FINANCE 

be  looked  upon  with  much  favor  for  rediscount  pur- 
poses. At  any  rate,  no  reputable  banker  cares  to  lend 
twice  on  the  same  assets,  nor  does  he  care  to  have  his 
customers'  trade  acceptances,  which  become  two-name 
paper,  discounted  on  the  open  market  or  with  finance 
corporations,  after  a  bank  loan  has  already  been  made. 
The  real  function  of  the  trade  acceptance  would  seem 
to  be  remedial — to  improve  the  quality  of  a  concern's 
receivables  and  so  improve  its  credit  position  and 
increase  the  turnover  of  its  working  capital. 

The  various  emergency  methods  of  financing  for 
working  capital  purposes  require  little  mention  in  this 
place.  As  a  rule,  no  concern  should  pledge  its  receiv- 
ables or  borrow  on  other  security  except  as  a  last 
resort.  Additional  working  capital  above  what  the 
banks  can  safely  lend  should  be  secured  from  earnings 
reinvested,  rather  than  through  public  financing. 
When  it  becomes  necessary  through  hard  luck  or  bad 
management  to  sell  senior  securities  in  order  to  protect 
the  current  position,  one  can  only  say,  ''God  help  the 
unfortunate  borrower!" 

Just  as  no  family  can  thrive  permanently  without 
proper  food,  and  no  salaried  man  can  save  unless  his 
wife  is  a  careful  buyer,  so  no  business  concern  can  hope 
/  for  success  unless  it  knows  how  to  buy  right,  in  quality, 
in  quantity,  in  price,  and  in  time.  _No  concern  is 
stronger  than  its  purchasing  policy.  Unwise  buying, 
buying  too  much  and  at  the  wrong  time,  has  wrecked 
the  largest  companies.  Few  concerns  during  the  past 
year  have  failed  to  suffer  bitterly  because  of  the  heavy 
shrinkage  in  high  cost  and  unnecessarily  large  inven- 
tories. As  the  housewife  lays  in  an  enormous  stock 
of  25-cent  sugar,  though  when  it  costs  only  7  cents 
per  pound  she  buys  only  from  hand  to  mouth,  so  when 
prices  are  high  and  goods  apparently  scarce,  the 
business  man  seems  unable  to  resist  the  temptation  to 
"load  up."  In  the  case  of  the  retailer,  the  overbuying 
is  usually  the  fault  of  the  salesmen,  who  talk  high 
prices  in  order  to  make  present  sales.     The  losses  due 


PRODUCTION  AND  FINANCE  23 

to  a  wrong  purchasing  policy,  even  though  there  be  no 
inventory  shrinkage,  are  serious  because  of  the  slower 
turnover  of  working  capital,  if  for  no  other  reason. 

The  dangers  of  underbuying  are  relatively  too  small 
to  be  noted.  In  a  small  manufacturing  business,  in 
which  the  various  operations  are  coordinated  in  one 
man,  there  sometimes  seems  to  be  less  danger  of  excess 
buying  than  in  the  larger  corporations  where  the  labor  ^ 
of  supervision  is  divided.  Nor  is  it  a  safe  policy  for 
an  industrial  concern  to  speculate  on  the  raw  material 
which  it  uses;  it  is  much  like  stock  market  gambling — 
a  few  gain  but  most  lose. 

Finally,  the  fact  cannot  be  too  strongly  stressed 
that  the  firm  which  buys  for  cash  has  the  world  at  its 
feet.  As  Petrarch  puts  it,  ''There  is  no  place  so  strong 
but  that  an  ass  laden  with  gold  will  find  his  way  in." 
Better  still,  to  paraphrase  the  words  of  Adam  Smith, 
"There  will  never  be  any  scarcity  of  wine  for  him  who 
hath  the  wherewithal  to  pay  for  it."  The  buyer  who 
has  ready  money  can  always  get  the  best  prices  be- 
cause he  is  beholden  to  none. 

In  the  production  end  of  most  manufacturing  con- 
cerns great  financial  losses  arise.  The  true  costs  are 
frequently  not  known  with  sufficient  accuracy  or 
frequency.  By  many  smaller  competing  concerns 
goods  are  even  sold  at  an  actual  loss.  They  make 
money  until  they  fail!  Nor  are  the  most  profitable 
methods  of  production  utilized.  According  to  the 
much  discussed  ''Hoover  Report"  more  wastes^  in^|  / 
production  are  charged  to  the  management  than  to  (  ' 
labor,  which  has  ordinarily  been  blamed  for  inefficiency. 
Whatever  the  theories  may  be,  it  is  true  without 
question  that  the  wastes  arising  from  wholly  unneces- 
sary labor  turnover  are  enormous.  The  economic 
wastes  arising  from  style  changes,  lack  of  standardiza-  !  y 
tion,  and  similar  causes,  are  vast,  and  in  the  long  run 
mean  lower  profits  for  all  industries.  At  a  given  time, 
however,  it  is  difficult  to  know  how  great  this  effect  may 
be.     Nor  should  it  be  overlooked  that  there  are  ihtan- 


<L 


24  PROBLEiMS  IN  BUSINESS  FINANCE 

gible  gains  coining  from  the  mental  satisfactions  derived 
from  constant  variety  in  goods  produced. 

So  much  has  been  written  about  the  economies  of 
large  scale  production  and  the  advantages  of  horizontal 
and  vertical  combination,  that  the  topic  seems  hardly 
worth  mentioning  in  this  connection.  It  may  be  noted, 
however,  that  very  frequently  the  alleged  decrease  in 
cost  of  production  resulting  from  an  increase  in  the 
size  of  the  organization  is  illusory.  While  from  the 
engineer's  point  of  view  the  so-called  manufacturing 
costs  may  be  lessened,  because  of  plant  specialization, 
or  the  use  of  more  economical  units  of  equipment,  and 
the  like,  yet  as  a  business  grows  larger  through  the 
absorption  of  other  concerns,  there  are  many  added  ' 
expenses  not  incurred  by  the  smaller  productive  units.  J 
These  unforseen  increases  between  factory  cost  and""^ 
price  to  customer  seem  frequently  to  devour  a  consid- 
erable part  of  the  original  economy.  A  one  man  con- 
cern grown  large  is  frequently  an  exception  to  this  rule, 
as  are  also  the  smaller  concerns  which  are  centrally 
managed  though  not  actually  combined. 

This  entire  subject,  and  the  allied  question  of  inte- 
gration and  development  of  subsidiary  companies, 
furnishes  a  fruitful  field  for  further  study.  This  book 
is  not  concerned  with  the  financing  of  combinations  as 
such,  which  frequently  amounts  to  a  mere  juggling 
of  balance  sheets  and  is  not  a  part  of  the  normal 
financial  conduct  of  an  industry. 

In  recent  years  attention  has  been  directed  to  the  vol- 
ume of  sales  in  dollars,  rather  than  to  the  number  of 
units  sold.  Hence  comparisons  now  being  made  with 
the  preceding  years  prove  rather  depressing,  though  in 
many  cases  there  is  really  not  much  cause  for  gloom.  ^ 
People  cannot  eat  much  more  food  or  use  more  of  ^ 
the  staples  just  because  prices  are  falling — nor  will  they.  J 

It  is  an  American  commercial  trait  to  overrate  the 
selling  end  of  the  business.  Salesmen  are  paid  an 
exceptionally  high  salary  because  they  "get  the 
business."     It  is  very  true  that  most  businesses  could 


SELLING  AND  FINANCE  25 

not  long  exist  without  their  salesmen  and  their  adver- 
tising. Yet  the  fact  remains  that  a  great  part  of  the 
energy  expended  in  selling  goods  is  in  the  main  an 
apparent  economic  waste.  Were  it  not  for  the  nature 
of  our  industrial  competition  and  the  fact  that  "every- 
body's doing  it,"  it  should  not  be  neces.sary  to  incur 
so  much  expense  Irntrjing  to  convince  the  customer 
that  Chesterfield  cigarettes  are  better  for  him  than 
Fatimas!  Since  the  public  is  willing  to  pay  the  bills, 
there  must  be  some  intangible  gain,  and  no  doubt 
competition  in  selling  keeps  up  the  standard  of  effi- 
ciency so  as  to  lower  costs.  This  again  is  a  matter  for 
further  investigation,  particularly  in  so  far  as  the  ulti- 
mate financial  results  of  advertising  are  concerned. 

It  is  much  more  significant  that  many  business 
concerns  are  constantly  out  of  breath  in  their  endeavors 
to  keep  up  with  their  salesmen,  who  "over-sell"  certain 
lines  of  goods  when  the  selling  is  easy,  and  then  call 
on  the  management  for  more  plant  capacity  in  order 
to  supply  a  demand  which  proves  to  be  only  temporary. 
Many  a  concern,  having  expanded  under  such  pressure 
during  recent  years,  has  now  been  effectively  soM  into_ 
the  receiver's  hands  or  the  vbankruptcy  courts 

Mention  should  also  be  made  of  another  reprehensible 
sales  policy — that  of  making  special  concessions  to 
customers,  particularly  in  the  way  of  granting  unduly 
long  terms.  It  is  not  the  function  of  a  selling  concern 
to  act  as  a  banker;  the  practice  is  dangerous  for  the 
seller  and  doubly  dangerous  for  the  customer.  The 
latter  fools  himself  into  thinking  that  he  is  a  business 
success  when  he  is  really  hovering  on  the  brink  of  failure. 
Many  an  incompetent  upstart  bursts  into  business 
because  of  the  fact  that  dealers  are  willing  to  carry  his 
accounts  for  a  long  time.  The  results  are  in  the  long 
run  usually  disastrous  all  round,  and  the  ultimate  con- 
sumer again  pays  the  bills.  Collections  should  at  all 
Jimes  be  prompt.  It  is  no  kindness  to  let  a  customer 
form  the  habit  of  being  slow  and  losing  his  discounts. 

Finally,  it  should  be  the  aim  of  every  concern  to 
keep  its  stock  rapidly  moving,  even  though  the  margin 


26  PROBLEMS  IN  BUSINESS  FINANCE 

of  profit  is  lower.  Money  tied  up  in  inventory  yields 
no  income.  If  values  shrink  and  losses  must  be  taken, 
they  should  be  taken  early.  The  business  can  thus, 
after  cleaning  out  the  old  stock,  put  itself  in  a  strong 
position  to  buy  at  the  best  market,  and  to  start  com- 
petition with  lower  costs.  The  importance  of  the 
same  pohcy  should  be  impressed  on  customers.  It  is 
criminal  to  urge  them  to  overbuy,  while  such  a  policy 
inevitably  reacts  on  the  finances  of  the  selling  house. 

As  to  the  Administration  of  Earnings,  little  need  be 
added.  If  the  management  is  honest,  there  will  be 
no  doubt  about  the  policy  followed.  In  fact,  with 
reasonable  intelligence,  there  is  less  likelihood  of  going 
wrong  at  this  point  than  at  most  others.  Adequate 
maintenance  should  be  provided  for,  ample  depreciation 
allowed,  and  liberal  surpluses  built  up  against  less 
prosperous  years.  Improvements  should  be  made  out 
of  earnings  and  not  out  of  capital.  After  this  point, 
the  rest  is  comparatively  simple.  If  the  business  is 
privately  owned,  the  question  of  dividend  policy  is 
frequently  not  raised.  If  the  stock  is  more  widely 
held,  however,  dividends  should  not  under  any  circum- 
stances be  paid  until  a  margin  of  net  income  equal  to 
at  least  one  year's  reasonable  dividend  payments  has 
been  accumulated.  If  the  future  looks  ominous, 
dividends  should  rarely  be  paid,  even  though  earned 
by  a  considerable  margin. 

With  these  considerations  in  mind,  the  dividend 
policy  will  be  determined  largely  by  the  exigencies  of 
the  particular  case.  If  the  holders  of  common  stock 
have  actually  paid  cash  for  their  shares,  they  are  entitled 
to  a  fair  return  for  the  risks  taken.  Yet,  it  is  always  a 
conservative  policy  to  put  back  into  the  business  one 
dollar  for  every  dollar  paid  out  in  dividends,  until 
such  time  as  it  appears  that  the  accumulated  profits 
of  the  stockholders  would  yield  a  higher  income  if 
invested  by  them  outside  the  business.  In  the  light 
of  these  general  suggestions,  particular  cases  regarding 
expansion  out  of  earnings  can  be  decided.     When  the 


FINANCIAL  FAILURES  27 

earnings  permit,  this  should  ordinarily  be  the  rule; 
for  the  expansion  should  not  be  planned  unless  the 
owners  feel  that  the  proposition  will  pay  well,  and  that 
their  income  from  the  added  construction  will  be  high. 

According  to  the  statistics  of  the  Treasury  Depart- 
ment, in  1918  there  were  115,518  business  corporations 
in  the  United  States  with  no  annual  net  income. 
Inactive  concerns  having  been  deducted,  the  number 
was  71,907,  or  more  than  26  per  cent  of  all  active 
business  corporations  in  the  country.  Of  those  cor- 
porations reporting  net  income,  118,370,  or  58.6  per 
cent,  had  a  net  income  below  $5,000,  while  only  1,026, 
or  one-half  of  one  per  cent,  reported  a  net  income  in 
excess  of  $1,000,000  annually. 

This  preponderance  of  very  small  incomes  is  striking. 
When  the  two  groups  are  combined,  it  appears  that 
190,277,  or  more  than  69  per  cent  of  all  active  business 
corporations  in  the  United  States,  either  reported  no 
net  income,  or  an  annual  net  income  under  $5,000.  The 
figures  are  still  surprising,  even  when  due  allowance 
is  made  for  the  well-known  methods  of  tax  evasion. 
It  is  obvious  that  the  average  industrial  concern  was 
not  making  fabulous  profits,  although  1918  was  an 
unusually  prosperous  year.  Of  course,  a  majority  of 
these  concerns  were  small,  but  some  were  no  doubt 
very  large. 

During  this  same  year  the  number  of  failures  reported 
by  Bradstreet's  was  10,146,  of  which  only  222  had 
liabilities  in  excess  of  $100,000.  The  financial  difficul- 
ties of  the  present  are  leading  to  much  larger  failures 
than  ever  before.  Yet  it  appears  that  the  smaller 
concerns  are  the  ones  which  usually  suffer  most.  Many 
of  the  larger  industrial  units  borrow  so  heavily  from 
their  banks  that  the  latter  find  it  more  worth  while 
to  carry  them  over  the  crisis  than  to  let  them  go  into 
bankruptcj^,  when  the  plant  would  sell  for  almost 
nothing. 

At  the  present  time  it  is  customary  for  failing 
concerns  to  attribute  their  difficulties  to  the  post-war 


28  PROBLEMS  IN  BUSINESS  FINANCE 

conditions,  to  labor  squabbles,  to  legal  restrictions,  or 
what  not.     These,  to  be  sure,  are  important  factors  in 
the  situation.     But  such  causes  could  not  have  operated 
so  effectively  had  the  internal  financial  weakness  not 
already  been  present.     In  other  words,  with  the  timely  ) 
application  of  reasonable  foresight   and   intelligence",  i 
probably  the  majority  of  recent  failures  could  have  ^ 
been  averted.  / 

It  is  unnecessary  here  to  enumerate  the  specific 
causes  of  failure.  They  can  be  readily  deduced  from 
the  preceding  discussion.  It  should  be  stated,  how- 
ever, that  in  many  cases  it  is  probably  well  for  the 
failures  to  come.  There  are  a  large  number  of  wholly 
inefficient  little  concerns  which  should  never  have 
been  launched.  Then  there  are  the  "war  babies,"  in 
the  begetting  of  which  a  momentary  pleasure  was 
realized,  but  which  were  doomed  from  birth.  The 
pity  of  it  all  is  that  so  many  otherwise  good  concerns 
are  failing  largely  because  of  fundamental  ignorance 
of  business  conditions  and  economic  principles. 

It  has  from  time  to  time  in  the  past  two  years 
afforded  rather  gruesome  diversion  to  read  statements 
by  certain  alleged  leaders  of  business,  explaining  the 
reasons  for  their  great  success  and  formulating  general 
rules  of  sound  finance ;  then  to  learn  a  few  months  later 
that  the  corporations  which  they  had  developed  were 
in  a  receiver's  hands  and  that  they  themselves  were 
ejected  from  the  management.    Sic  transit  gloria  mundi. 

The  rules  of  the  game  are  after  all  very  simple — so 
simple  that  comparatively  few  recognize  them.  Prob- 
ably little  new  light  on  the  fundamentals  of  business 
finance  has  been  discovered  for  many  generations.  It 
is  to  be  hoped  that  the  extraordinary  degree  of  co- 
operation which  has  arisen  out  of  the  present  emergen- 
cies— cooperation  between  banks  and  business  con- 
cerns, and  between  various  business  concerns  them- 
selves—will in  a  measure  continue  during  more  settled 
days,  and  that  the  lessons  in  the  fundamentals  of 
finance  now  being  learned  in  bitterness  of  spirit  will, 
because  of  this  cooperation,  not  soon  be  forgotten. 


CHAPTER  II 

FINANCIAL  CONSIDERATIONS 
INVOLVED  IN  BEGINNING  A  BUSINESS 

References : 

*Conyngton,  Financing  an  Enterprise^  particularly  pages  3-161. 

Conyngton,  Corporate  Organization  and  Management,  39-48. 
*Duncan,  Marketing,  Its  Problems  and  Methods,  21-60;  277-314. 
*  Jones,  The  Advnnistration  of  Industrial  Enterprises,  21-56. 

Keir,  Manufacturing  Industries  in  America,  61-85. 

Lough,  Business  Finance,  11-63. 
*Loughj  Corporation  Finance,  49-64:^" 

Mead,  Corporation  Finance,  Chapters  ii  and  in. 

Regan,  Financing  a  Business,  1-47. 
*Robinson,  Organizing  a  Business,  29-67,  186-20. 

Shaw,  An  Approach  to  Business  Problems,  25-52,  115-130. 

Throughout  the  book  it  is  assumed  that  the' student  will  have  a 
general  knowledge  of  the  subject  such  as  can  be  derived  from  the  rapid 
reading  of  a  text  like  Lough's  Business  Finance.  The  most  helpful 
references  are  marked  with  an  asterisk  (*).  Where  it  will  facilitate 
the  work  of  the  student,  an  appropriate  reference  is  also  given  by 
author's  name  following  particular  problems.  The  general  Outline 
and  Bibliography  at  the  beginning  of  the  book  should  also  be  consulted. 


COUNTLESS  attempts  are  made  to  launch 
enterprises  which  cannot  under  any  circum- 
stances be  successful.  Provided  the  idea 
in  itself  seems  good,  many  people  look  no  further. 
Hundreds  of  milhons  of  dollars  are  wasted  every 
year  on  utterly  futile  propositions.  The  following 
problems,  closely  related  to  the  problems  in  Chapter 
III,  attempt  to  direct  attention  to  some  of  the  vital 
financial  considerations  involved  in  connection  with 
the  launching  of  a  new  enterprise. 

29 


30  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  1 

General  Problem  in  the  Launching  of  Various 
Types  of  Businesses* 

Consider  yourself  an  impartial  financial  adviser, 
chiefly  interested  in  the  smaller  business  concerns. 
Your  expert  advice  is  asked  .upon  the  following  prop- 
ositions: 

A.  Smith,  who  can  depend  upon  sufficient  financial 
backing  and  who  is  supposed  to  have  good  business 
sense,  wishes  to  start  a  small  rubber  factory  in  an  Ohio 
town  in  1919.  He  is  45  years  of  age,  energetic,  of  excel- 
lent character,  and  has  a  thorough  knowledge  of  the 
rubber  tire  business. 

Questions 
■f^j^ic<       1.  What  advice  would  you  give  him?     Indicate  in 
detail  the  reasons  for  your  decision  and  the  considera- 
tions involved. 


*The  following  suggestions  are  pertinent: 

"There  are  certain  fundamental  factors  which  enter  into  the  selection 
of  every  plant  site.  It  is  the  weighing  of  these  factors  and  establishing 
the  relative  importance  of  each  that  assists  most  in  drawing  scientific 
conclusions  and  deciding  upon  the  proper  location  for  the  plant.  The 
main  factors  may  be  classified  as  follows:  Market,  foreign,  domestic, 
national  or  local.  B — Raw  materials,  principal  and  secondary.  C — 
Transportation,  rail,  water,  motor  trucks.  D — Labor,  male,  female, 
skilled,  unskilled.  E — Power,  coal,  fuel,  oil,  electric.  Secondary  facts: 
A — Climatic  requirements,  if  any.  B — Public  utihties  required. 
C — Dependency  upon  municipal  environment.  D — Dependency  on 
municipal  laws  or  ordinances.  E — Advertising  value  of  plant.  F — 
Financial  aids,  capital,  bonus,  free  site.  G — Disposal  of  plant  wastes. 
In  outlining  the  above  factors  it  will  be  seen  that  the  primary  ones  are 
those  which  usually  enter  most  prominently  into  the  production  and 
distribution  costs  of  the  product,  which,  as  stated  previously,  are  kept 
at  a  minimum  by  a  properly  selected  site.  These  are  the  items,  then, 
that  should  receive  careful  and  thorough  study  and  should  be  weighed 
in  relation  to  each  other  for  any  particular  industry.  It  is  understood, 
of  course,  that  in  various  industries  the  importance  of  these  factors 
will  differ  and  in  some  industries  some  of  the  secondary  factors  will 
assume  major  importance.  But  the  more  consideration  that  is  given 
toward  establishing  the  relative  value  of  these  factors,  the  more  likely 
it  is  that  the  proper  site  will  be  chosen." 

(Adapted  from  H.  H.  McCanna,  in  Industrial  Management,  June  1, 
1921,  p  396.) 


LAUNCHING  THE  ENTERPRISE  31 

V'       2.  Would  you  have  given  the  same  advice  in  1913? 

3.  Would  your  advice  have  been  the  same  if  the 

prospective    location    of    the    factory    had    been    in 

Cambridge,  Massachusetts?    San  Francisco,  California? 

(See  Jones,  el  al.)  '  ^<5^^^<f'^ 


B.  Brown  has  worked  for  20  years  in  a  shoe  factory 
and  knows  the  manufacturing  end  thoroughly,  having 
held  all  positions  from  that  of  errand  boy  to  that  of 
foreman.  He  has  saved  $10,000.  As  the  concern  for 
which  he  is  working  is  a  family  affair,  he  decides  that 
there  is  no  real  future  for  himself  if  he  remains.  Since 
the  shoe  business  is  the  only  one  that  he  knows,  he 
wishes  to  start  a  little  shoe  factory  of  his  own  in  Brock- 
ton, Massachusetts,  in  1910. 

Questions 

1.  How  would  you  determine  the  probabilities  of  "^  ^'  -asu-^^*- 
success  in  the  new  venture?  ^  _ 

2.  What  kind  of  advice  would  you  give  \i\mf^f^'^'*^^rtr^  y^*'*^*^^ 

3.  If  Brown  had  wished  to  begin  the  business  early  ' 

in  1920,  in  Minneapolis,  would  you  have  given  the  same         ,. 
advice?    '^r^  </,  ^t^itc^* 

(Reference:     Keir,  Manufactwing  Industries  in  America,  p.  235,  ff.) 


C.  Jones,  who  has  an  ordinary  education  and  has 
worked  in  subordinate  positions  in  retail  grocery  stores 
as  well  as  in  candy  making  concerns,  inherited  $5,000 


32  PROBLEMS  IN  BUSINESS  FINANCE 

early  in  1919.  As  he  wished  to  be  more  independent, 
some  of  his  friends  advised  him  to  start  up  a  candy- 
making  business  and  others  advised  him  to  open  a 
retail  candy  store. 

^'^<f^ '  ^tc  Question ^  ^     .^z  ,..jf 
What  would  be  your  analysis  of  the  proposition, 
and  how  should  you  have  advised  him? 


D.     Dr.  F,  a  professor  of  chemistry  in 

University,  discovers  a  new  process  for  making  a  rare 
shade  of  dye,  which  hitherto  has  never  been  produced  in 
this  countryi  Being  hard  pressed  for  funds,  late  in 
1920  he  offers  to  sell  his  process  to  a  friend,  B.  This 
friend  was  formerly  engaged  in  the  manufacture  of 
chemicals,  but  has  been  inactive  since  the  end  of  the 
war.  For  a  consideration  of  $10,000  he  offers  his  secret 
process,  together  with  his  services  in  getting  the  plant 
started.  It  was  estimated  that  an  additional  S40,000 
would  be  necessary  to  install  the  plant.  The  total  cost, 
$50,000,  was  just  equal  to  B's  entire  capital.  Hence, 
he  was  desirous  of  knowing  definitely  whether  the  busi- 
ness would  be  profitable. 

Question 
Indicate  the  various  considerations  involved,   and 
the  steps  in  reaching  your  decision. 


LAUNCHING  THE  ENTERPRISE  33 

E.  To  summarize  the  concrete  result  of  the  fore- 
going discussions,  under  what  conditions  is  the  launch- 
ing of  a  new  enterprise  financially  justified? 

(Reference:     Conyngton,  Financing  an  Enterprise,  p.  35-77.) 


F.  In  each  of  the  foregoing  cases  what  form  of 
organization  would  you  consider  the  most  desirable 
and  why — individual  ownership,  partnership,  or  cor- 
poration? -      ■'■■  .  ^tM,M^t^^ 

(Reference:     Robinson^  Organizing  a  Business.)  / 

[^    -■  -^  •     ^-^ 


G.     1.  Is  it  financially  desirable  for  a  business  con- 
cern to  be  incorporated  in  the  state  where  it  operates?        '/^ 
Why  or  why  not?  ^  A^ 

2.  Will  your  decision  differ  depending  upon  the  size 
or  nature  of  the  business?    ;, 

(References:    Lough,  Corporation  Finance,  49-64;  Conyngton,  Cor- 
porate Organization  and  Management,  39-48.) 


Problem  2 
Shall  a  Chain  of  Toy  Shops  Be  Financed? 

Recently  the  following  advance  information  was 
privately  circulated  regarding  the  organization  and 
financing  of  the  United  Toy  Shops: 


34  PROBLEMS  IN  BUSINESS  FINANCE 

Two  Big  Objects 
Two  big  objects  will  be  attained  through  the  establish- 
ment of  a  chain  of  United  Toy  Shops  across  the  country. 
The  American  factories  will  have  their  business  stabilized 
and  be  practically  assured  of  a  continuity  of  operation  twelve 
months  in  the  j'ear,  rather  than  depending  upon  a  short 
seasonal  rush.  This  fact,  coupled  with  the  ability'  of  a 
chain  store  organization  to  buy  in  large  quantities  for  a 
great  many  stores,  will  enable  the  American  boy  and  girl 
to  secure  toys  at  a  more  stable  price  than  is  possible  under 
the  present  methods  of  high-pressure  seasonal  demand. 

A  New  Industry 
Prior  to  the  War,  we  depended  on  Germany  and  other 
countries  for  our  toys.  There  was  little  incentive  here  for 
the  investment  of  capital  in  the  toy  business.  However, 
since  the  War  and  with  the  advent  of  high-grade  mechanical 
toys,  to  take  the  place  of  foreign  gimcracks,  new  factories 
by  the  hundreds  started  up,  and  the  American  toy  makers 
began  a  career  of  production  and  development  that  has  been 
equaled  only  in  the  automobile  field.  In  fact,  a  new 
industry  has  been  created  in  this  country,  jumping  over- 
night from  a  production  of  a  few  million  dollars  to  one 
approaching  one  hundred  millions  in  1920.  The  great  toy 
fair  held  in  New  York  this  year  opened  our  eyes  to  perhaps 
America's  fastest  growing  industry,  and  just  as  we  have  led 
the  world  in  automobile  production,  so  we  are  already 
leading  the  world  in  toy  production. 

An  All-Year  Business 
Toys  are  a  product  that  do  not  seem  to  feel  business 
depression,  as  it  has  been  noticed  that  in  periods  of  "hard 
times"  toys  are  apt  to  sell  even  better  than  ever.  Further- 
more, just  as  the  automobile  business  has  been  changed 
from  a  summer  trade  to  an  all-year-round  one,  so  toys  are 
coming  into  their  own  for  all  times  of  the  year.  Easter 
season,  for  example,  is  becoming  as  great  a  toy  season  as 
Christmas,  and  by  the  methods  to  be  employed  by  United 
Toy  Shops  in  publicity  and  advertising,  the  business  will  be 
a  constant  one  throughout  the  year — with  naturally  increased 
demand  around  the  various  holiday's. 

Advance  Financing 
During  the  organization  period  of  United  Toy  Shops  and 
prior  to  the  selection  of  officers,  directors,  etc.,  an  oppor- 
tunity is  afforded  to  participate  in  the  advance  financing 
on  a  very  satisfactory  basis.  This  is  a  real  chance  to  get 
into  a  big  chain  store  enterprise  at  the  very  start.     We 


LAUNCHING  THE  ENTERPRISE  35 

believe  this  is  the  first  time  the  public  generally  has  been 
invited  to  participate  in  a  retail  chain  store  organization  at 
the  outset. 

The  Company  as  it  progresses  will  need  hundreds  of 
active  men  and  women  for  executive  and  other  positions 
and  those  who  participate  in  the  advance  financing  have 
naturally  an  excellent  opportunity  along  these  line«. 

Capitalization 

United  Toy  Shops  will  be  one  holding  company  operating 
its  various  shops  just  as  Wool  worth's,  Ligget's,  etc.,  are 
operated  from  one  main  office  with  district  offices  and 
managers. 

Capitalization  of  the  Company  is  to  be  as  follows: 

8%  Gold  Coupon  Ten  Year  Debenture  Bonds.  .  .  .$1,000,000 

Class  A  Common  Stock  No  Par  Value 50,000  shares 

Class  B  Common  Stock  No  Par  Value 5,000  shares 

Stock  to  be  Full  Paid  and  Non-Assessable. 

Class  B  stock  is  to  be  owned  by  the  founders,  but  will  not 
receive  any  dividends  until  the  Company  has  earned  at 
least  $5,000,000  in  any  year — that  is,  Class  A  stock  will  be 
entitled  to  dividends  up  to  $100  a  share  annually  Vjefore  any 
dividends  are  paid  on  Class  B  shares.  Then  the  balance 
will  be  divided  between  the  two  classes. 

As  the  Class  A  stock  will  be  sold  in  a  large  measure, 
according  to  present  plans,  with  the  Debenture  Bonds,  it  is 
seen  that  the  stock  will  no  doubt  be  owned  chiefly  by  the 
public  and  not  controlled  by  any  special  interests. 

The  plans  are  for  the  Company  to  make  application  to  list 
both  the  Debenture  Bonds  and  Class  A  shares  on  the  New 
York  Stock  Exchange  when  the  Company  is  fully  financed. 

Earnings 

Careful  consideration  has  been  given  to  the  prospective 
earnings  of  United  Toy  Shops.  i>a^ed  on  the  fact  that  the 
profit  in  toys  is  large  and  that  the  (Company  will  no  doubt 
do  a  good  mail-order  business  from  eaA\  store  through  its 
catalogs,  distributed  in  the  towns  surrounding  the  city 
where  there  is  a  shop,  in  addition  to  the  sales  in  the  shop,  it 
is  felt  that  a  profit  of  approximately  $70  a  day  per  shop  is  very 
conservative.  This  would  amount  to  about  $20,000  annually. 
One  hundred  shops  on  this  basis  would  show  a  profit  of 
$2,000,000  a  year,  which  would  be  equivalent  to  nearly 
$40  per  share  on  the  entire  50,000  shares  of  Class  A  stock. 

1  hree  hundred  shops  on  this  basis  would  thus  readily  show 
earnings  of  $100  per  share  on  the  Class  A  stock.  What  the 
possibilities  are  in  years  to  come  when  the  Company  is  able 
to  operate,  say,  1,000  shops,  it  is  difficult  to  estimate. 


36  PROBLEMS  IN  BUSINESS  FINANCE 

That  the  above  figures  are  reasonable  can  be  seen  from 
the  fact  that  Woolworth's  net  income  last  year  was  around 
$10,000,000,  selling  five-  and  ten-cent  articles,  whereas  the 
average  purchase  at  a  United- Toy  Shop  would  no  doubt  be 
several  times  that  of  a  Woolworth  store,  and  a  great  deal 
larger  volume  of  business  per  store  is  expected  with  larger 
profits  per  dollar  sale  and  smaller  selling  or  clerk  hire  expense. 

Subscription  Prices 

Subscriptions  may  be  placed  for  United  Toy  Shop 
securities  on  the  following  basis: 

$100  Face  Value  Debenture  Bonds  and  10  Shares  Class  A 
stock  @  $100. 

$200  Face  Value  Debenture  Bonds  and  20  shares  Class  A 
stock  @  $200. 

$300  Face  Value  Debenture  Bonds  and  30  shares  Class  A 
stock  @  $300. 

$400  Face  Value  Debenture  Bonds  and  40  shares  Class  A 
stock  @  $400. 

$500  Face  Value  Debenture  Bonds  and  50  shares  Class  A 
stock  @  $500. 

Larger  units  in  proportion.  Above  special  offer  is  for 
immediate  acceptance  for  a  limited  amount  only  and  will 
positively  be  withdrawn  as  soon  as  organization  of  Company 
is  completed,  after  which  the  Class  A  stock  will  be  sold  at 
a  price  consistent  with  its  possible  earning  power  and  the 
showing  of  the  Company. 

What  United  Toys  Offers  as  an 
Investment  Possibility 

Taking  figures  under  "Earnings"  as  a  basis,  United  Toys 
seems  to  offer  an  excellent  investment  possibility. 

Figuring  on  a  subscription  of  say  $300,  you  receive  $300 
in  Debenture  Bonds  to  yield  8%  yearly  and  30  shares  of 
Class  A  stock  given  as  a  bonus. 

With  100  shops  showing  earnings  of  around  $40  a  share, 
this  will  be  equivalent  to  $1,200  on  your  30  Class  A  shares. 
With  300  shops  in  operation  and  estimating  dividends  at 
$100  a  share,  this  would  net  you  $3,000  annually.  In  this 
case  the  value  of  your  shares,  figuring  on  a  basis  of  10%  for 
valuation,  would  be  around  $30,000. 

While  we  cannot  make  any  promises  or  guarantees  of  any 
kind  with  reference  to  earnings  or  dividends  of  United  Toys, 
yet  we  feel  that  the  Class  A  shares  offer  unusual  speculative 
possibilities,  and  even  the  large  possible  returns  cited  above 
are  small  compared  to  what  other  concerns  have  paid  to 
those  who  invested  at  the  begimiing.  The  man  who  in- 
vested $500  in  United  Cigars  at  the  beginning  is  said  to 


LAUNCHING  THE  ENTERPRISE  37 

have  earnings  from  the  stock  of  S4,000  a  year  and  the  stock 
to  be  worth  around  $40,000. 

We  feel  that  the  toy  business  will  be  one  of  our  leading 
industrials  within  a  few  years,  and  on  this  basis  United  Toy 
Shops  should  justify  all  our  expectations  of  earning  power. 

Subscription  Understanding 
Subscriptions  are  now  being  received  for  the  securities  of 
United  Toy  Shops  with  the  understanding  that  the  name 

United  Toy  Shops,  Inc. 
has  been  approved  by  the  Secretary  of  State  of  New  York, 
and  of  other  states,  and  that  the  corporation  papers  will  be 
put  through  as  soon  as  all  legal  details  have  been  taken  care 
of,  final  draft  of  charter  approved,  etc. 

All  subscriptions  are  being  received  by  the  United  Toy 
Shops  Organization,  to  whom  checks  must  be  made  out. 
The  United  Toy  Shops  Organization  guarantees  to  deliver 
the  bonds  and  stock  as  specified  in  subscription  form  if  same 
is  accepted. 

Questions 

1.  Do  you  approve  of  launching  such  an  enterprise 
at  this  time? 

2.  Do  you  approve  of  the  financing  by  means  of 
debenture  bonds? 

3.  What  is  your  opinion  as  to  the  earning  power  and 
future  prospects  of  this  concern,  granting  that  it  can 
be  financed? 

4.  What  advice  would  you  give  to  a  friend  asking 
you  whether  he  should  invest  in  this  proposition? 


Problem  3 

Shall  a  Company  for  Exploiting  a  New 

Mechanical  Device  be  Launched? 

A  small  investment  house  sends  out  the  following 
account  of  the  method  by  which  a  machine  known  as 
the  Kuick  Koin  Kalkulator  is  to  make  money  for  those 


38  PROBLEMS  IN  BUSINESS  FINANCE 

who   invest  in   the   company   formed   to   exploit   the 
patent  rights: 

KuicK  KoiN  Kalkulator 

This  machine  is  designed  to  take  care  of  the  postage 
stamp  business  in  public  places,  such  as  hotels,  office  build- 
ings, drug  stores,  railway  stations  or  any  place  where  the 
sale  of  postage  stamps  has  become  a  nuisance.  This  machine 
actually  does  take  care  of  the  postage  stamp  business  because 
it  will  accept  any  coin  from  a  nickel  to  a  25^^  piece  and 
sell  to  the  customer  any  quantity  of  either  2^  or  l9^  stamps 
or  both,  which  may  be  desired,  and  deduct  the  amount 
purchased  from  the  coin  inserted  and  give  back  the  change 
due,  less  l^^.  The  change  is  always  short  l'^  because  each 
and  everj^  time  this  machine  operates  it  charges  1^  for  ser- 
vice so  that  every  time  the  machine  is  operated  it  earns  1^ 
for  itself. 

From  a  mechanical  standpoint  this  machine  is  a  very 
remarkable  machine  because  it  is  called  upon  constantly  to 
do  varying  work.  All  coins  are  inserted  in  the  same  inlet 
slot,  and  the  same  push-button  is  used  whether  you  buy  one 
stamp  or  24'?t  worth  of  stamps,  and  the  same  change-button 
is  used  whether  you  are  getting  change  for  a  nickle  or  change 
for  a  259^  piece.  The  machine  is  the  same  class  of  mechanism 
as  cash  registers,  adding  machines,  and  typewriters,  but 
unlike  these  machines  our  machine  is  fool-proof.  Operators 
have  to  be  taught  how  to  operate  cash  registers,  adding 
machines  and  typewriters  or  they  will  ruin  the  machines, 
while  our  machine  cannot  be  gotten  out  of  commission  by  the 
operator.  This  feature  of  the  machine  is  essential  because 
the  machine  is  left  by  itself  to  take  care  of  its  customers  as 
well  as  itself.  The  machine  always  deals  correctly  with  the 
operator,  and  if  for  any  reason  the  machine  becomes  exhausted 
of  its  supply  of  postage  stamps  or  change  so  that  it  cannot 
accommodate  the  customer,  it  immediately  locks  itself  up 
so  that  it  cannot  be  operated  until  its  merchandise  is 
replenished. 

The  machine  is  equipped  with  a  very  clever  coin-detecting 
mechanism  and  throws  out  spurious  coins  and  slugs  as  well 
as  foreign  money.  For  instance,  a  Canadian  25^^  piece  will 
immediately  be  returned  to  the  customer  as  will  a  telephone 
slug  or  anj'^  such  slug  made. 

The  machine  as  a  machine  is  a  complete  and  individual 
business  in  itself.  It  takes  care  of  itself  in  every  way.  It 
also  takes  care  of  the  customers  and  it  records  each  and 
every  deal  that  is  made  and  balances  its  cash  after  every 
transaction,  so  that  any  time  we  call  upon  the  machine  we 
know  exactly  how  much  the  machine  has  earned,  and  so  on, 


LAUNCHING  THE  ENTERPRISE  39 

so  that  the  machine  actually  does  run  a  business  of  its  own, 
as  well  as  do  its  own  bookkeeping  and  cashier  work. 

To  sum  up  the  whole  machine  from  a  machine  or  mechanism 
standpoint,  it  's  considered  by  all  engineers  who  have 
investigated  it  as  well  as  worked  upon  it,  to  be  the  most 
remarkable  piece  of  mechanism  ever  completed  and  per- 
fected, and  all  engineers  know  as  soon  as  they  look  at  this 
machine,  that  it  was  developed  only  after  many  years  of 
work  and  after  the  expenditure  of  many  hundreds  of  thou- 
sands of  dollars. 

This  because  the  machine  is  entirely  new  from  an  invention 
standpoint  and  there  is  nothing  to  date  of  record  in  the 
Patent  Office  from  which  assistance  could  be  gotten  in  the 
development  of  this  machine,  because  it  is  the  first  machine 
ever  attempted  which  would  sell  a  varying  quantity  of 
merchandise  out  of  one  coin.  The  machine  goes  farther 
because  it  sells  varying  quantities  of  varying  commodities, 
out  of  either  one  coin  or  varying  coins. 

Plan  of  Operation 

These  machines  are  notforsalebutarebeingplaced  in  public 
places,  such  as  above  mentioned.  The  reason  the  machine 
is  built  to  sell  postage  stamps  is  because  the  postage  stamp 
business  is  one  of  the  largest  lines  of  business  in  America 
in  actual  volume  of  dollars  and  cents  and  it  is  the  only 
business  which  is  actually  built  up  and  in  existence  which  no 
one  wants  who  has  it.  Whenever  a  concern  is  found  which 
has  a  nice  large  postage  stamp  business,  we  find  they  are 
very  anxious  to  unload  this  business  on  someone  else, 
because  it  is  a  constant  nuisance  to  them  as  well  as  a  constant 
expense,  so  that  we  are  relieved  of  the  common  cost  in  selling 
devices  of  this  character,  and  the  selling  cost  of  such  machines 
has  been  proven  to  be  very  high.  All  we  have  to  do  is  to 
manufacture  our  machines  and  haul  them  around  and  install 
them  in  places  where  they  have  the  stamp  business  already 
established  for  us.  Immediately  after  the  machine  is  in- 
stalled it  begins  to  earn  money,  real  cash  money,  and  it 
continues  to  do  this  earning  practically  indefinitely. 

Looking  our  whole  proposition  over  from  every  angle  and 
basing  our  possible  earnings  on  machines  which  are  actually 
in  operation  and  which  have  been  in  operation  for  a  period 
ranging  from  one  and  one-half  years  to  six  months,  it  does 
not  seem  as  though  there  is  any  limit  to  the  possibilities  for 
big  profits  in  this  business,  because  on  an  output  of  five 
thousand  machines  per  year  we  could  hardly  take  care  of 
the  new  drug  stores,  new  hotels,  new  office  buildings,  etc., 
which  are  being  opened  up  each  year  in  the  United  States. 
In  addition  to  this,  the  stamp  business  is  doubling  and  has 


7 


40  PROBLEMS  IN  BUSINESS  FINANCE 

doubled  every  five  years  in  the  large  cities,  ever  since  the 
Government  took  over  the  operation  of  the  postage  stamp 
business.  Some  of  the  cities  have  doubled  their  stamp 
business  every  two  years  for  a  period  of  years.  The  postage 
stamp  business  of  the  entire  United  States  has  doubled 
on  an  average  of  every  eight  years,  but,  of  course,  the  cities 
increase  faster  than  the  rural  districts,  hence  the  reason  for 
the  cities  doubling  every  five  years.  This  ratio  of  increase 
is  certainly  to  continue  because  mailings  constantly  increase 
with  the  increase  of  education. 

There  are  just  three  questions  to  be  decided  in  a  person's 
mind  as  to  whether  or  not  this  proposition  will  be  a  success. 
The  questions  follow : 

First:    Does  the  machine  do  the  work? 

Second :    Is  there  a  field  for  the  machine? 

Third :    Will  the  public  pay  the  penny  toll  for  the  service? 

Answering  the  above: 

First:  Four  machines  placed  for  six  months  in  the  Grand 
Central  Station  earned  $6  to  $8  per  day.  One  machine 
at  the  Morrison  Hotel  in  Chicago  earned  over  $1,500  per 
year  for  three  years. 

Second:  There  is  certainly  a  field  for  the  machine  be- 
cause 90%  of  the  postage  stamps  sold  in  large  cities  to  the 
people  who  actually  put  the  stamps  on  the  mailings  are 
retailed  outside  of  the  post-office. 

Third :  People  are  now  paying  the  toll  which  this  machine 
exacts  and  are  doing  it  gracefully.  By  standing  around  one 
of  these  machines  which  is  being  operated  by  the  public  one 
will  learn  that  every  person  who  works  this  machine  thinks 
it  is  worth  the  money  and  they  all  marvel  at  how  the  machine 
can  accomplish  what  it  does.  Even  though  we  had  not 
already  proven  that  the  public  would  pay  the  toll,  it  has 
been  proven  manj^  times  in  recent  years  that  the  public  are 
willing  to  pay  for  service  provided  that  by  paying  for  the 
service,  they  can  save  time  or  save  annoying  someone  else, 
and  it  is  a  proven  fact  that  any  device  which  saves  time  and 
sells  service  is  a  success  and  always  a  big  money  maker. 

Our  proposition  is  strictly  a  public  service  proposition  and 
is  not  unUke  the  telephone,  which  is  nothing  more  or  less 
than  a  time  saver.  If  you  want  to  mail  a  letter  you  have  to 
have  a  postage  stamp  and  you  have  the  privilege  of  paying 
us  for  serving  you  or  walking  to  the  post-office  and  securing 
a  postage  stamp  at  its  face  value.  You  have  the  same  propo- 
sition in  the  telephone  because  you  can  always  walk  or  ride 
to  where  the  party  is  to  whom  you  want  to  talk,  but  in 


LAUNCHING  THE  ENTERPRISE  41 

most  cases  it  is  good  business  to  pay  a  nickel  and  use  the 
teleplione.  The  difference  between  our  proposition  and  the 
telephone  is  that  one  telephone  is  no  good  to  anyone  and 
will  make  no  money,  a  complete  exchange  system  being 
necessary  before  the  telephone  system  can  be  operated, 
while  in  our  proposition  each  machine  is  a  money  maker 
itself  and  has  no  connection  with  any  other  machine  and  no 
wire  connections  and  no  franchises  or  central  girls  are 
necessary  to  the  machine  in  order  that  it  earn  money. 

There  never  has  been  another  proposition  in  the  world,  of 
which  we  have  been  informed,  which  had  as  many  attractive 
features  connected  with  it  as  this  proposition,  which  has  a 
greater  field  in  which  to  expand,  and  it  would  be  silly  for 
any  man  to  even  assume  what  the  ultimate  earnings  of  this 
proposition  will  be. 

Questions 

1.  Discuss  critically  the  claims  made  for  this  machine 
as  a  money  maker. 

2.  Granting  that  the  machine  itself  is  all  that  is 
claimed,  do  you  think  that  a  business  launched  to 
deal  in  the  machines  would  be  a  financial  success? 

3.  Assuming  that  you  favor  the  launching  of  this 
new  enterprise, 

(a)  How  do  you  think  the  proposition  should  be 
financed? 

(5)  What  form  of  organization  should  be 
followed? 

(c)  Should  the  concern  manufacture  its  own 
machines? 

(Reference:     Conyngton,  Financing  ari  Enterprise,  81-94,   147-163. ( 


Problem  4 
Harnessing  the  Tides! 

On  January  1st,  1921,  the  following  material,  with 
illustrations,  occupied  a  full  page  of  a  widely  read  and 
very  conservative  eastern  daily: 


42  PROBLEMS  IN  BUSINESS  FINANCE 

New  Year's  Greetings  to  the  people  of  New  England 
from  the  Universal  Tide  Power  Company ! 

(Author's  note: — Under  this  were  photographs  of  the  pleasant  condi- 
tions enjoyed  by  tlie  "subscribers  to  the  Universal  Tide  Power  Com- 
pany" whether  at  home,  on  the  railways,  or  in  the  factories.) 

Do  you  want  to  eliminate  j'our  coal  bill?  If  so,  you  are 
cordially  invited  to  call  at  the  home  of  the  Universal  Tide 
Power  Company. 

The  Knowlton  Hydraulic  Air  Motor,  which  generates  light, 
heat  and  power  from  the  tides.  Patents  issued  in  the  United 
States,  Canada,  Argentina,  Chili,  England  and  France. 
Demonstration  plant  now  under  construction. 

The  Universal  Tide  Power  Company  is  organized  under 
the  laws  of  Massachusetts  and  capitalized  at  $10,000,000. 
Patent  rights  to  first  town  accepting. 

New  England  community  building  initial  tide  power  plant 
will  get  preference. 

One  of  the  greatest  boons  that  this  northern  climate  has 
ever  known  will  come  when  the  method  invented  by  John 
A.  Knowlton  to  generate  power  from  the  tides  is  put  into 
practice.  A  demonstration  plant  to  show  the  practicality  of 
this  .system  is  now  being  built  at  East  Saugus  by  the  Univer- 
sal Tide  Power  Company. 

"As  inventor  of  the  Knowlton  hydraulic  air  motor  and 
treasurer  of  the  Universal  Tide  Power  Company,"  declared 
Mr.  Knowlton,  "it  has  been  my  great  desire  to  put  heat  in 
the  homes  at  a  minimum  cost." 

This  is  the  season  of  the  year  which  above  all  others 
brings  with  it  the  desire  to  give,  to  help,  and  in  that  spirit 
the  company  is  renewing  its  offer  of  the  past  and  will  give 
the  rights  free  to  the  first  city  of  Massachusetts  or  the  first 
New  England  state' which  will  build  a  plant.  The  city  or 
state  the  first  to  build,  would  be  able  to  furnish  not  only  the 
needed  heat  to  its  people,  but  light  and  power  as  well,  and 
all  for  a  nominal  cost  to  them.  Further,  this  could  not  fail 
to  lower  taxes,  which  together  with  the  low  cost  of  heating, 
should  be  followed  by  lower  rents.  The  Universal  Tide 
Power  Company  has  sent  a  letter  making  this  offer  to  the 
mayor  of  every  city  in  ]\Iassachusetts  and  to  the  Governor 
of  each  of  the  New  England  states. 

With  the  completion  of  the  demonstration  plant,  within 
the  next  few  months,  this  offer  will  lie  withdrawn.  The 
company  is  not  making  this  offer  for  selfish  gain,  but  from 
our  honest  desire  to  serve  the  public  well,  and  as  practical 
expression  of  gratitude  to  the  masses  of  the  people  of  New 
England  whose  generous  support  has  made  its  success  possi- 
ble.    While  the  people  will   necessarily  benefit  eventually 


LAUNCHING  THE  ENTERPRISE  43 

from  the  installation  of  tide  power  plants  the  added  saving 
to  them  in  money  from  the  prompt  acceptance  of  this  offer 
would  be  great  and  relief  from  dependence  upon  coal  would 
be  immediate. 

I  am  making  this  public  announcement  for  the  Universal 
Tide  Power  Company  because  it  can  serve  the  people  only 
through  the  officials  who  represent  them,  and  desire  the 
people  of  this  state  and  of  New  England  to  know  that  this 
opportunity  is  theirs,  and  that  only  through  inaction  on  the 
part  of  their  executives  can  it  be  lost  to  them. 

I  believe  the  company  will  receive  the  cooperation  from 
these  officials  which  the  people  have  a  right  to  expect,  and 
I  have  cordially  invited  them  to  send  the  best  hydraulic 
engineers  which  the  Government  —  state  or  nation — can 
furnish,  to  inspect  the  Universal  Tide  Power  plant  at  East 
Saugus,  see  the  plans  and  specifications  and  the  working 
model  at  the  home  office,  and  to  make  their  expert  opinions 
known. 

Six  months  later  the  company  was  sending  out 
literature  as  follows: 

The  Press  unanimously  declare  that  power  can  be  derived 
from  the  tides. 

Understanding  your  opportunity  pays. 

Billions  in  Inventions 

An  estimate  made  ten  years  ago  shows  that  American 
manufactures,  which  have  for  their  foundation  inventions — 
fully  protected  by  Government  patents — amounted  to  the 
enormous  sum  of  $21,000,000,000. 

The  men  and  women  who  get  these  billions  are  the  men 
and  women  who  invested  in  inventions  and  the  industries 
inventions  build.     This  is  Your  Opportunity! 

Act  Now!        Price  of  Shares  Now  $3.00        Don't  Delay 
Bonus  on  All  Cash  Sales 

Cash 
From  One  Share  up  for  Cash 

$  75.00  buys  27  Shares 
$  150.00  buys  55  Shares 
$  300.00  buys  110  Shares 
$  600.00  buys  220  Shares 
$1050.00  buys  385  Shares 

Term  Payments 
$75.00  buys  25  Shares  $15  down  and  4  monthly  payments 
of  $15. 


0 


44  PROBLEMS  IN  BUSINESS  FINANCE 

$150.00  buys  50  Shares  $30  down  and  4  monthly  payments 
of  $30. 

$300.00  buys  100  Shares  $60  down  and  4  monthly  pay- 
ments of  $60."^ 

$600.00  buys  200  Shares  $120  down  and  4  monthly  pay- 
ments of  $120. 

$1050.00  buys  350  Shares  $210  down  and  4  monthly  pay- 
ments of  $210. 

Finances 

The  financial  standing  of  the  Universal  Tide  Power  Com- 
pany is  yery  satisfactory.  We  haye  no  debts,  our  liabilities 
consisting  of  outstanding  shares  and  current  bills  only.  Our 
assets  consist  of  deposits  in  the  bank.  Bills  collectible 
amounting  to  a  considerable  sum — our  holdings  at  Saugus, 
to  which  may  be  added  the  yalue  of  work  done  there,  and 
several  hundreds  of  dollars  worth  of  other  properties;  such 
as  models,  films  and  projectors,  office  furniture,  tools  and 
automobiles  used  in  our  business. 

Important:  The  plant  now  being  built  by  this  company 
at  East  Saugus,  Massachusetts,  is  for  demonstration  pur- 
poses only.  Dividends  and  profits  will  come  later  from  the 
sale  of  patent  rights. 

This  invention  is  patented  in  six  countries  and  is  designed 
to  utilize  the  tremendous  possibilities  of  the  waste  waters  of 
the  world. 

After  installation  there  will  be  but  slight  cost  for  main- 
tenance of  plant,  the  ENERGY  for  which  (WATER)  will 
cost  nothing,  against  the  ever-increasing  cost  of  coal. 

THE  TIDES  WILL  PERSIST  IN  WORKING  PERPETUALLY, 
THUS  MAY  THE  USE   OF   COAL  BE   ELIMINAT'ED 

Price  of  Shares  soon  to  Advance 

Questions 

1.  Granting  that  the  men  back  of  this  proposition 
are  honest,  and  granting  that  electricity  can  be  gener- 
ated in  the  way  which  they  state,  do  you  think  that 
there  is  any  financial  justificajbion  for  the  launching 
of  this  concern?    Why? 

2.  Specifically,  what  important  considerations,  if 
any,  appear  to  you  to  have  been  overlooked  in  con- 
nection  with   this   proposition? 

3.  Assuming  for  the  moment  that  so  far  as  can  be 
determined     the     company     will     ultimately     prove 


LAUNCHING  THE  ENTERPRISE  45 

successful,  do  you  believe  that  it  should  be  financed 
in  the  way  indicated? 

(Reference:     Conyngton,  and  Jones,  Investments,  310-328.) 


Problem  5 
Launching  a  Fire  Insurance  Company  in  1921 

Early  in  1921  a  group  of  men  in  Wisconsin  were 
endeavoring  to  launch  a  new  fire  insurance  company. 
In  their  attempt  to  secure  money  for  financing  this 
proposition,   they  stressed  particularly  three  things: 

In  the  first  place  they  attempted  to  show  by  means 
of  statistics  that  fire  insurance  companies  both  in 
number  and  in  volume  of  business  done  had  by  no 
means  increased  in  proportion  to  the  actual  increase 
in  building  valuation  during  the  last  few  years. 

Secondly,  they  showed  that  in  proportion  to  the 
building  valuation  in  the  State,  people  in  Wisconsin 
were  carrying  far  less  fire  insurance  than  in  most  of 
the  larger  states,  and  relative  to  the  possibilities  for 
fire  insurance  business,  the  State  was  not  well  supplied 
with  fire  insurance  companies.  Hence  there  should  be 
a  very  good  field  for  a  new  fire  insurance  company. 

Finally,  they  suggested  that  the  fire  insurance  busi- 
ness, as  demonstrated  by  the  experience  of  the  old-line 
companies  in  the  Eastern  States,  is  a  highly  profitable 
undertaking  with  relatively  steady  earnings. 

Questions 
1.  Should  you  expect  that  the  launching  of  a  new 
fire  insurance  company  at  the  time  and  place  indicated 
was  justified? 


46         PROBLEMS  IN  BUSINESS  FINANCE 

2.  What  is  your  opinion  of  the  reasons  given  by  the 
promoters  for  the  formation  of  this  company? 

3.  Do  you  think  it  desirable  that  a  fire  insurance  com- 
pany be  operated  as  a  corporation  or  as  a  mutual 
benefit  association? 

(Reference:  Zartman  and  Price,  Properly  Insurance,  121-147, 
309-322.) 

4.  If  the  attempt  had  been  made  to  launch  a  new 
life  insurance  company  at  the  same  time  and  place, 
analogous  arguments  having  been  presented  by  the 
promoters,  what  would  your  answer  have  been? 

(Reference :    Zartman  and  Price,  Personal  Insurance,  75-94,  297-309.) 


Problem  6 
An  Attempt  at  Financing  a  Commercial  Paper  House 

In  May,   1921,  the  following  prospectus  of  a  new 
stock  issue  appeared  privately  in  Boston: 

Tax  Free  in  Massachusetts 

NEW  issue         Free  of  Normal  Federal  first  offering 

Income  Tax 

S350,000 

Company 

Established  Incorporated 

1916  (A  Massachusetts  Corporation)  1921 

8%  cumulative  preferred  stock 

Par  Value  SlOO 

Redeemable  at  $110  and  accrued  dividend 

Dividends  payable  quarterly  on  the  first  day  of  January, 
April,  July  and  October. 

1,750  Shares  Common  Stock 
No  Par  Value 


LAUNCHING  THE  ENTERPRISE  47 

The  following  is  summarized  from  a  letter  of 
Mr ,  President : 

The  Company  is  an  established  commercial  paper  house. 
It  maintains  offices  at .... ,  Devonshire  Street,  Boston,  and 
will  establish  and  maintain  offices  in  the  principal  financial 
centers. 

The  capital  is  always  liquid  and  has  been  turned  over 
better  than  110  times  in  the  year  of  1920,  yielding  a  gross 
profit  of  30%  on  its  capital. 

Among  the  company's  clients  are  some  of  the  leading 
manufacturing  and  mercantile  companies  in  the  country. 
The  house  is  favorably  known  to,  and  does  business  with, 
the  leading  banks. 

The  business  in  which  this  company  is  engaged  is  per- 
manent and  is  becoming  of  greater  importance  every  year. 

The  growth  of  the  business  since  1916  has  been  steady  and 
conservative  with  all  safety.  Profits  have  also  increased 
steadily  each  year. 

We  offer  this  stock  in  units  of: 

2  Shares  of  8%  Cumulative  Preferred  (par  value  $100 
per  share). 

1  Share  of  Common  Stock  (no  par  value). 

Accompanying  the  prospectus  was  a  letter  from  the 
president  of  the  new  company,  from  which  the  follow- 
ing excerpts  are  made : 

Business 
Commercial  Paper  Brokers — The  primary  business  of 
a  commercial  paper  house  is  dealing  in  three  to  six  months' 
notes  of  manufacturing  and  mercantile  concerns,  whose 
credit  is  of  sufficiently  high  standing,  disposing  of  the  same 
to  banks  who  purchase  for  short-time  investment  as 
secondary  reserve.  These  notes  being  rediscountable  with 
the  Federal  Reserve  Bank  when  having  not  more  than 
ninety  days  to  run. 

Sales  and  Earnings 
For  the  past  five  years  we  give  the  number  of  times  our 
capital  was  turned  over  and  our  gross  profit  each  year. 

Capital  Turned  Over  Gross  Profit 

1916 50  times  18% 

1917 87     "  23% 

1918 95     "  24% 

1919 100     "  28% 

1920 110     "  S0% 


48  PROBLEMS  IN  BUSINESS  FINANCE 

Customers 
The  customers  on  our  books  at  this  time  include  cotton 
manufacturers,    rubber    companies,    woolen    mills,    candy 
companies,  shoe  and  leather  concerns,  jobbers  and  various 
mercantile  businesses. 

Commercial  Paper  Scope 

National  in  Scope — About  four  billion  dollars  of  com- 
mercial paper  is  sold  by  brokers  annually.  Practically  all 
large  manufacturing,  mercantile,  and  textile  concerns  now 
seek  the  open  market  for  temporary  capital  through  the 
sale  of  their  short-time  notes  to  commercial  paper  brokers. 

Offices  are  estabhshed  in  principal  financial  centers,  and 
business  is  solicited  from  corporations  and  firms  of  highest 
standing,  and  their  paper  distributed  to  banks  in  the  section 
of  the  country  where  funds  are  most  plentiful  at  the  moment, 
as  it  may  often  happen  that  the  demand  for  funds  for  busi- 
ness is  heavy  in  the  East,  while  the  banks  in  the  Middle 
West  have  surplus  funds  to  loan,  or  vice  versa. 

There  are  only  about  fifteen  large  commercial  paper  houses 
in  the  country,  most  of  which  are  operated  as  partnerships. 
The}^  occupy  a  unique  position  in  the  banking  world,  co- 
operating as  they  do  with  the  banks  and  soundest  commer- 
cial establishments,  and  they  enjoy  the  highest  reputations. 

Capital 
With  a  capital  of  ^1,350,000  paid  in,  this  company  should 
take  a  position  as  one  of  the  leading  commercial  paper 
houses  of  the  country.     This  amount  paid  in  would  allow 
us. to  do  a  business  of  at  least  S125, 000,000  a  year. 

Profits 
Assuming  we  turn  our  capital  but  one  hundred  times  a 
year  and  make  a  gross  profit  of  but  25%,  we  would  show  the 
following  profit  on  our  capital : 

Capital $1,250,000 

Estimated  gross  profit $312,500 

8%  Preferred  Stock. .  .$100,000 
Expenses,  Taxes,  etc. . .     75,000 

$175,000       175,000 

Net $137,500 

Sinking-Fund  (Director's  Discretion 

not  to  exceed  25%) 34,250 

Balance $103,250 

Leaving  a  balance  of  $103,250  applicable  to  the  common 
stock,  or  $8.26  per  share. 


LAUNCHING  THE  ENTERPRISE  49 

Safety 

Under  the  present  methods  of  credit  investigations  and 
audits  by  certified  public  accountants,  the  risk  from  loss 
is"  very  small.  The  writer  cannot  recall  in  over  twenty 
years'  experience  a  .single  failure  of  a  commercial  paper  house. 

Liquidation 
This  Company  deals,  as  stated  above,  only  in  obligations 
of  the  strongest  corporations  and  firms,  which  are  approved 
by  the  most  conservative  banks,  and  it  can  readily  be  seen 
that  its  assets,  consisting  as  they  do  of  notes  and  accep- 
tances having  7iot  more  than  six  months  to  run,  completely 
liquidate  themselves  in  that  period  of  time. 

Questions 

1.  Analyze  this  prospectus  critically. 

2.  Do  you  approve  of  this  method  of  securing 
capital  for  a  commercial  paper  house? 

3.  Does  this  seem  to  you  to  be  a  desirable  time  for 
launching  a  new  commercial  paper  house,  or  expanding 
an  old  one? 

4.  Who  should  you  expect  to  buy  this  stock? 

5.  Assuming  yourself  to  be  the  president  of  an 
industrial  concern,  would  you  wish  to  sell  your  com- 
mercial paper  through  this  house? 

6.  As  a  buyer  of  commercial  paper,  should  you  be 
disposed  to  purchase  the  notes  sold  by  this  house? 

7.  Would  you  expect  that  the  services  of  university 
graduates,  with  business  school  training,  could  be  se- 
cured to  assist  in  the  stock-selling  campaign? 

8.  What  is  your  prediction  as  to  the  future  of  this 
concern? 

(Referencea:  Phillips,  Bank  Credit,  260-262;  MoultoD,  Financial 
Organization,  428-430.) 


50  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  7 
Launching  a  Small  Investment  Company  in   1921 

The Investment    Company    was    organized 

in  1921  with  a  small  amount  of  capital  privately 
subscribed.  Its  chief  purpose  was  to  act  as  a  dis- 
tributor of  the  shares  of  the Company  de- 
scribed in  Problem  6.  The  officers  further  said  that 
they  expect  to  make  a  good  deal  of  money  buying  and 
selling  securities  of  such  well-known  concerns  as  the 
Cities  Service  Company,  as  well  as  of  some  concerns 
not  so  well  known  and  of  rather  uncertain  financial 
standing. 

Questions 

1.  What  is  your  opinion  as  to  the  desirability  of 
launching  this  business  from  the  financial  point  of  view? 

2.  What  should  you  expect  its  future  to  be? 

3.  Do  you  think  an  investment  banking  house 
should  be  incorporated  or  unincorporated? 

4.  From  the  point  of  view  of  incorporation,  is  a 
commercial  bank  in  any  different  position  from  an 
investment  banking  house? 

(References:     Conyngton,  639-651;  Moulton,  215-217.) 


V 


PART  II 
SOURCES  OF  CAPITAL 


CHAPTER  III 

THE  PROBLEMS  OF  RAISING 
FIXED  CAPITAL 


References : 

Collver,  Hoio  to  Analyze  Industrial  Securities. 
*Conyngton,  Financing  an  Enterprise,  165-651. 

Dewing,  Financial  Policy  of  Corporations,  Vol.  i.  (passim)  and  *Vol- 

II,  48-60,  104-168. 
*Jones,  Investments,  218-344,  and  passim. 
*Lough,  Business  Finance,  64-104,  130-353. 

Lough,  Corporation  Finance,  Chapters  vi,  vii,  ix-xiv,  xvi-xix. 
*Lyon,  Corporation  Finance,  Part  i,  p.  1-143,  166-219,  also  Part  ir. 

Mead  Corporation  Finance,  Chapters  iv-xiii,  xix-xxvi. 

Regan,  Financing  a  Business,  4S-122. 
*  Walker,  Corporation  Finance,  290-310. 


MUCH  depends  upon  the  methods  whereby  a 
business  concern  is  originally  financed.  Finan- 
cial difficulties  frequently  arise  from  the  adop- 
tion of  a  plan  not  suited  to  the  nature  of  the  industry, 
the  size  of  the  organization,  or  the  period  in  the  Busi- 
ness Cycle.  Many  concerns  expand  too  soon.  The 
usual  tendency  is  to  overbuild.  Often  a  business  man 
who  is  highly  successful  as  an  organizer,  a  producer,  or 
a  seller,  has  very  nebulous  ideas  regarding  the  best 
methods  of  financing.  The  results  of  this  lack  of  bal- 
ance are  often  highly  disastrous. 

In  the  problems  which  follow,  some  of  the  more  im- 
portant aspects  of  the  subject  of  Fixed  Capital  financ- 
ing are  touched  upon.  Many  of  these  problems  are 
closely  related  to  those  given  in  Chapters  II  and  V. 

53 


54  PROBLEMS  IN  BUSINESS  FINANCE 

Exercise  I 
How  Much  Capital  is  Needed? 

Estimate  the  minimum  amount  of  capital  needed  to 
begin  any  one  of  the  following  different  kinds  of  busi- 
nesses, indicating  clearly  the  considerations  involved 
and  the  reasons  for  your  conclusions : 

1.  An  Agricultural  Implement  Factory 

2.  An  Automobile  Factorj'^ 

3.  A  Candy  Factory 

4.  A  Chemical  Plant 

5.  A  Cotton  Mill 

6.  A  Cutlery  Factory 

7.  A  Hosiery  Mill 

8.  A  Paper  Mill 

9.  A  Pottery 

10.  A  Printing  Establishment 

11.  A  Rubber  Tire  Factory 

12.  A  Shoe  Factory 

13.  A  Steam  Laundry 

14.  A  Steel  Plant 

15.  A  Watch  and  Clock  Factory 

16.  A  Woolen  Mill 

(Suggested  references:  Massachusetts,  Statistics  of  Manufactures; 
U.  S.  Census,  1910,  Vol.  viii,  Manufactures,  Chapter  x;  Regan, 
Financing  a  Business,  48-67;    Walker,  Corporation  Finance,  206-212.) 


A.    GENERAL  METHODS  OF  RAISING 
FIXED  CAPITAL 

Problem  8 

General    Problem    in   Raising    Fixed    Capital    for    a 

Small  Business 

Two  printers  in  an  Iowa  town  who  had  decided  to 
take  over  a  plant,  got  together  one  evening  to  figure 
out  how  to  raise  the  necessary  money.  Every  con- 
ceivable method  of  financing  their  plant  was  discussed, 
item  by  item;  material  resources,  loans,  investments. 

Fredericks  had  a  house  and  lot  worth  three  thousand 
dollars  mortgaged  for  one  thousand  dollars.  Barnes 
had  several  influential  friends  he  thought  might  con- 
sent to  a  loan,  some  stock  in  a  doubtful  proposition, 


RAISING  FIXED  CAPITAL  55 

and  his  life  insurance.  Together  they  had  eight  hun- 
dred dollars  in  cash. 

The  first  suggestion,  the  issue  of  stock,  involved 
the  probable  interference  of  stockholders,  and  further- 
more they  saw  that  it  would  be  as  easy  to  secure  out- 
right lenders  as  investors.  They  could  get  no  initial 
help  from  supply  houses  because  the  plant  was  already 
equipped  and  the  owner  demanded  cash.  The  moneyed 
partner  offered  nearly  the  same  objections  as  the  stock 
issue.  Finally  they  decided  that  to  borrow  on  all  their 
available  resources  would  almost  finance  the  enterprise. 

They  did  this: 

Fredericks  raised: 

On  house  and  lot  by  second  mortgage $  800 

On  household  effects 200 

Cash 400 

$1400 

Barnes  raised: 

From  friends  on  personal  note $  500 

On  his  life  insurance 300 

On  his  $1000  unlisted  stock 200 

Cash 400 

$1400 

Twenty-eight  hundred  dollars  was  the  total  amount 
they  were  thus  able  to  raise.  They  needed  thirty-two 
hundred  dollars  to  buy  out  the  plant,  and  an  additional 
five  hundred  dollars  for  their  expenses.  They  worked 
together  now,  and  fortunately  they  had  begun  to  plan 
far  enough  ahead  so  that  there  was  still  time  to  proceed 
with  caution.  The  partner  was  the  only  recourse. 
First  they  canvassed  among  their  friends.  Those  who 
had  money,  however,  had  already  been  drawn  upon 
for  loans.  As  a  last  resort  they  advertised  for  another 
investor.  From  among  those  who  replied  they  found 
one  man  who  consented  to  put  seven  hundred  dollars 
into  the  business  and  remain  a  silent  partner.  He  had 
been  watching  the  records  of  the  printers  and  was  sat- 
isfied that  he  was  making  a  good  investment. 

This  amount  raised  their  capital  to  thirty-five  hun- 
dred dollars.     They  still  needed  two  hundred  dollars. 


56  PROBLEMS  IN  BUSINESS  FINANCE 

This  was  for  a  part  of  the  running  expense.  To  cover 
this  amount  they  sohcited  work  in  advance.  The  owner 
of  the  building  where  the  plant  was  situated  gave  an 
order  for  work  which  he  accepted  in  payment  of  the 
rent.  The  other  minor  expenses  were  met  in  the  same 
way. 

(Quoted  from  Shaw,  How  to  Finance  a  Business,  13-15.) 

Questions 

1.  Examine  critically  the  arguments  of  these  two 
men. 

2.  What  seem  to  you  to  be  the  strong  or  weak  points 
of  this  plan  of  financing? 

3.  Do  you  see  any  other  alternatives  than  those 
selected? 


Problem  9 
Dealer  Help  in  Financing  Fixed  Capital 

It  is  common  for  manufacturers  of  machinery  used 
by  printers  to  sell  on  receipt  of  an  initial  payment, 
frequently  not  higher  than  one-third  of  the  price,  and 
to  take  the  balance  on  the  customer's  notes  payable 
over  a  considerable  period  of  time.  This  time  is  fre- 
quently extended  over  two  or  three  years. 

Questions 

1.  Do  you  approve  of  this  policy? 

2.  In  what  specific  ways  might  this  policy  affect: 

(a)  The  finances  of  the  newly  organized  print- 
ing establishments, 

(b)  The  finances  of  the  old  established  print- 
ing concerns? 


RAISING  FIXED  CAPITAL  57 

Problem  10 
Two  Simple  Methods  of  Fip^ncing  a  New  Pottery 

A.  Some  twenty-five  or  thirty  years  ago,  several  busi- 
ness men  in  a  small  town  in  the  Middle  West,  decided 
that  it  would  be  profitable  to  build  a  pottery.  Although 
none  of  them  knew  much  about  the  business  from  actual 
experience,  they  had  friends  in  an  adjoining  city 
who  had  found  the  potter^^  industry  very  profitable. 
Accordingly,  they  formed  a  partnership  agreement, 
each  putting  into  the  business  a  few  thousand  dollars. 
No  money  was  borrowed.  After  a  few  years  of  up's 
and  down's,  the  management  discovered  that  their 
knowledge  of  the  market  was  not  sufficient  to  enable 
them  to  get  orders  enough  to  make  the  business  profit- 
able. Accordingly,  they  secured  for  manager  a  man 
who  was  known  as  a  first-class  salesman  of  chinaware, 
in  the  hope  that  he  would  bring  to  the  business  what 
they  found  lacking  in  themselves. 

B.  To  the  same  town,  a  few  years  later,  came  a  man 
whose  entire  life  had  been  spent  in  the  pottery  business. 
He  had  worked  himself  up  from  the  lowest  paid  jobs 
to  the  position  of  superintendent  in  a  pottery  in  a 
nearby  city.  He  had  no  capital  of  his  own,  but  felt 
that  he  could  make  a  big  success  if  he  could  have  an 
opportunity  to  organize  and  manage  his  own  factory. 
Accordingly,  he  proposed  the  following  plan  to  the  peo- 
ple of  the  town,  assuring  them  that,  as  a  result  of  the 
business  activity  and  increased  property  values  which 
would  come  through  the  establishing  of  a  new  industry, 
they  would  be  the  decided  gainers.  The  proposals 
adopted  were  as  follows: 

(a)  The  factory  site  was  donated  by  one  of  the  well- 
to-do  farmers  on  the  outskirts  of  the  town,  who  hoped 
to  be  able,  after  the  business  was  started,  to  sell  a  good 
amount  of  his  land  for  town  lots. 

(b)  Through  a  public  common  stock  subscription  of 
$15,000,  raised  to  a  large  extent  by  the  business  men 
who  expected  to  be  the  ultimate  gainers,  enough  money 
was  secured  to  erect  the  building. 


58  PROBLEMS  IN  BUSINESS  FINANCE 

(c)  In  order  to  raise  enough  money  to  equip  the 
plant,  shares  of  preferred  stock  were  sold  to  people  of 
the  community,  many  of  whom  had  already  subscribed 
to  the  common  stock.  Thus  about  $20,000  was  <  btained. 

(d)  The  additional  amount  needed  until  the  business 
could  get  on  its  feet,  about  $5,000,  was  secured  by 
placing  a  mortgage  on  the  property  which  was  to  be 
carried  by  the  local  bank. 

The  business  was  incorporated  with  the  promoter  as 
president  and  general  manager,  and  he  received 
$15,100  in  common  stock  as  his  "bonus." 

Questions 
1  Which  of  the  plans  appears  to  you  to  have  been 
the  more  satisfactory?     Why? 

2.  Examine  the  strength  and  weakness  of  each. 

3.  What  would  be  your  prediction  of  their  success? 


Problem  11 
Financing  a  Small  Rubber  Tire  Factory 

In  1909  a  new  rubber  tire  plant  was  launched  in  a 
middle  western  state  by  a  man  whose  life  had  been 
spent  in  the  hotel  business  in  the  city  of  Pittsburgh. 
He  had  $50,000  of  his  own  to  put  into  the  business, 
and  it  was  found  that  $500,000  more  would  be  needed 
in  order  to  put  the  factory  in  running  shape. 

Accordingly,  a  corporation  was  formed,  all  the  com- 
mon stock,  with  no  par  value,  being  issued  to  the  pro- 
moter and  his  family;  while  the  additional  capital  was 
raised  by  the  sale  of  preferred  stock,  largely  to  people 
in  the  locality.  The  dividends  on  the  preferred  stock 
were  cumulative  at  7  per  cent,  and  it  was  to  be  re- 
deemed by  the  company  at  110,  at  its  option,  within 
next  five  the  years  after  a  two-year  period  had  expired. 


RAISING  FIXED  CAPITAL  59 

The  funds  for  retiring  the  preferred  stock  were 
secured  largely  through  the  sale  of  additional  common 
stock,  after  the  concern  began  to  do  a  fair  business  and 
the  prospects  seemed  good.  In  selling  the  new  com- 
mon stock  the  company's  chief  selling  arguments  were 
as  follows: 

(a)  The  factory  had  brought  many  new  residents  to 
the  town,  and  so  had  made  more  business  for  all  and 
had  greatly  increased  property  values. 

(6)  Those  who  had  invested  in  the  common  stock 
of  the  Firestone  and  Goodyear  companies  had  within 
a  few  years  received  in  dividends  many  times  their 
original  investment. 

Questions 

1.  Do  you  consider  this  a  satisfactory  plan  of  financ- 
ing for  the  enterprise  in  question?  State  your  reason 
clearly. 

2.  Would  you  have  advised  a  friend  to  subscribe  to 
the  new  common  stock  of  the  company  in  1915?  In 
1919? 


Problem  12 
Public  Financing  of  a  Hotel 

In  January,  1921,  the  following  news  item  appeared 
in  a  city  paper: 

That  Providence  may  realize  on  scheduled  time  its  lonp;- 
cherished  project  of  having  one  of  the  noteworthy  hotels  of 
the  country,  the  contractors  who  are  building  the  $5,000,000 
structure  are  pushing  the  work  every  hour  every  day 
except  Sundays  and  holidays. 


60  PROBLEMS  IN  BUSINESS  FINANCE 

Interest  in  the  development  of  this  great  hotel  is 
general  throughout  Rhode  Island,  for  the  imposing  19- 
story  structure  has  been  financed  largely  by  popular  sub- 
scription. The  scheme  took  concrete  form  under  an  impulse 
furnished  by  the  Providence  Chamber  of  Commerce.  Aside 
from  its  importance  as  a  much  needed  improvement  to 
the  now  inadequate  accommodations  for  the  entertainment 
of  traveling  men  and  other  visitors  to  this  business  city,  the 
building  will  go  far  to  develop  the  civic  centre  to  which 
Providence  people  point  with  pride. 

The  first  efforts  of  the  chamber  of  commerce  were 
made  almost  10  years  ago.  The  hope  then  was  to  have  a 
12-story  building.  High  costs  of  labor  and  other  com- 
modities because  of  the  war  discouraged  the  project,  and  the 
matter  lay  quiescent  for  awhile.  It  was  then  revived,  and 
with  its  revival  the  ambition  grew  to  one  for  a  14-story 
building,  then  for  16  stories  and  finally  the  present  plan  for 
19  stories  was  settled  on. 

When  the  armistice  was  signed  the  chamber  returned  to 
its  hotel  enterprise  with  renewed  energy.  By  hard  team- 
work, stock  to  the  amount  of  $2,500,000  was  sold  by  popu- 
lar subscriptions.  Large  blocks  of  this  stock  were  taken 
by  corporations  and  financiers,  mostly  of  Rhode  Island; 
many  shares  were  sold  to  relatively  small  investors. 

Hundreds  of  clerks  and  others  in  Providence  hold  stock 
in  the  project.  The  spirit  behind  taking  this  stock  was 
deemed  to  be  not  that  of  gain  so  much  as  registering  faith  in 
the  future  of  Providence.  The  slogan  of  the  chamber,  "Do  it 
for  Providence,"  made  an  excellent  motto  for  this  campaign. 

The  Providence-Biltmore  Hotel  is  to  be  of  steel  frame 
construction,  with  limestone,  brick  and  granite  as  its  principal 
materials.  The  architectural  style  will  be  simple  and  colon- 
ial, in  keeping  with  the  traditions  of  Providence.  The  build- 
ing will  be  fireproof  in  every  particular,  its  architects  assert. 

It  will  contain  560  rooms,  arranged  to  accommodate  800 
guests.  The  18th  and  19th  floors  will  be  devoted  mainly 
to  a  ballroom,  supper  rooms  and  other  facilities  for  social 
functions.  The  19th  story  will  be  so  arranged  that  it  can 
be  used  as  a  roof  garden  in  summer. 

Those  who  have  been  working  for  the  project  say  they 
have  at  last  succeeded  in  putting  their  city  on  the  hotel  map 
and  believe  that  the  Biltmore  will  give  Providence  a  chance 
to  become  one  of  the  important  convention  cities  in  the 
country. 

Question 
Do  you  approve  of  this  plan  for  financing  the  con- 
struction of  a  hotel? 


VALUATION  OF  INTANGIBLES  61 

B.    VALUATION  OF  INTANGIBLES 

Problem  13 

Valuation  of  Patents  and  Other  Intangibles 
IN  AN  Old  Concern 

The Company,  engaged  in  the  making  of 

gear  shapers,  was  solely  the  creation  of  one  man's 
brain.  It  had  been  operating  for  about  twenty  years. 
During  this  time  the  aim  had  been  to  perfect  gear 
cutters  which  would  be  as  accurate  as  human  ingenuity 
could  make  them.  The  man  at  the  head  of  the  con- 
cern thought  little  of  profits  and  put  all  the  earnings 
back  into  the  business.  Further,  a  large  amount  of 
money  was  spent  in  experimenting  with  a  view  to 
developing  the  most  effective  machinery  for  making 
the  output.  In  many  cases,  long  years  of  develop- 
ment lay  back  of  an  apparently  simple  piece  of  ma- 
chinery. Most  of  the  machines  were  patented.  There 
was  no  other  concern  in  the  United  States  which 
was  able  to  turn  out  such  perfect  gear  cutters 
and  appliances.  The  product  was  used  extensively 
by  practically  all  automobile  manufacturing  con- 
cerns and  automobile  accessory  companies.  The 
market  was  more  than  nation-wide,  and  since  no 
other  concern  could  make  as  desirable  a  product, 
the Company  may  be  said  to  have  en- 
joyed a  monopoly. 

A  year  or  two  ago,  the  man  at  the  head  of  the  con- 
cern realized  that  he  was  growing  old,  and  that  it  would 
probably  be  desirable  to  reorganize  the  business  and 
distribute  the  ownership  more  widely.  Consequently 
he  wished  to  know  just  what  the  value  of  his  business 
was,  with  a  view  to  capitalizing  the  enterprise  at  a 
reasonable  figure. 

Various  accountants  and  engineers  worked  over  the 
proposition  in  detail,  and  it  was  finally  agreed  that  the 
capitalization  should  be  on  the  basis  of  40  per  cent  for 
tangible  assets  and  60  per  cent  for  intangibles.  The 
latter  included  development  expenses,  10  per  cent, 
and  patent  rights,  50  per  cent. 


62  PROBLEMS  IN  BUSINESS  FINANCE 

Questmns 

1.  In  a  business  of  this  sort,  suggest  how  the  engineers 
might  arrive  at  a  fair  value  for  the  patent  rights. 

2.  Do  you  believe  that  it  was  a  wise  policy  for  the 
Company  to  patent  most  of  its  machines? 

3.  Do  you  believe  that  it  would  have  been  desirable 

for  the Company  to  capitalize  its  intangibles 

in  the  manner  indicated? 

4.  From  the  point  of  view  of  selling  the  common 
stock  of  this  company  to  effect  a  change  in  ownership, 
do  you  see  any  advantages  or  disadvantages  in  capital- 
izing the  intangibles  at  a  high  rate? 

5.  Assuming  that  the Company  had  been 

producing  goods  which  were  distributed  under  a  trade- 
mark, should  you  have  considered  the  case  in  favor  of 
the  capitalization  of  intangibles  to  be  stronger  or  weaker 
than  under  the  present  situation? 

(Reference:     Conyngton,  Financing  an  Enterprise,  188-227)- 


Problem  14 
Valuation  of  Patents  in  a  New  Concern 

An  officer  of  a  concern  organized  early  in  1921  gives 
the  following  account  of  the  purpose  of  the  concern  and 
the  financial  plan  under  which  it  has  been  organized: 

A  refrigeration  engineer,  Brown,  has  made  improve- 
ments in  ice  manufacturing  processes  which  will  lower 
the  cost  of  manufacture  about  40  per  cent.  These 
improvements  are  being  patented  and  the  patents 
properly  protected.  This  engineer  wished  to  build  a 
small  ice  manufacturing  plant,  partly  for  the  profit 
to  be  realized  from  the  plant  itself,  and  partly  for  the 


VALUATION  OF  INTANGIBLES  63 

purpose  of  demonstrating  the  value  of  his  improve- 
ments. The  plant  which  Brown  decided  to  build  will 
produce  25  tons  of  ice  a  day  at  a  profit  of  more  than 
$3  per  ton  in  excess  of  that  earned  by  the  ordinary 
plant.  This  profit  in  itself  will  mean  a  very  con- 
siderable income  from  the  business,  but  it  is  planned 
further  to  make  arrangements  with  other  ice  manu- 
facturers which  will  allow  them  to  use  the  improved 
methods  through  the  payment  of  a  royalty  of  509^ 
per  ton.  Thus  it  is  expected  that  the  profits  will 
constantly  grow  greater,  as  more  ice  manufacturers 
become  interested  in  the  new  processe.s  which  will 
make  money  for  all. 

Brown  had  little  capital  of  his  own,  but  wished  to 
maintain  control  of  the  business.  In  order  to  effect 
this  end,  a  company  was  incorporated  with  an  author- 
ized issue  of  $125,000  in  common  stock  and  $125,000 
in  preferred  stock.  The  engineer.  Brown,  received  in 
exchange  for  his  patent  rights  $62,510  of  the  common 
stock.  The  plant  cost  about  $27,000,  and  $3,000 
additional  was  needed  to  get  the  business  under  way. 
Hence  the  total  amount,  $30,000,  was  raised  by  selling 
preferred  stock,  cumulative  at  7  per  cent.  With  each 
share  of  preferred  stock  was  given  a  share  of  common. 
The  balance  of  the  stock  is  for  the  present  unissued. 

The  tentative  balance  sheet  of  the  new  company  as 
of  June  1,  1921,  is  as  follows: 

Assets 

Plant  and  equipment $  27,000 

Cash 3,000 

Patent  rights,  etc ^M^^ 

$122,510 

Liabilities 

Common  stock  (outstanding) $  92,510 

Preferred  stock  (outstanding) 30,000 

$122,510 

Questions 
1.  Is  the  launching  of  a  new  business  under  the  con- 
ditions outlined  financially  justifiable? 


64  PROBLEMS  IN  BUSINESS  FINANCE 

2.  Is  the  company  justified  in  putting  so  high  a  value 
on  its  patent  rights,  and  other  intangibles? 

3.  From  the  financial  point  of  view,  do  you  think 
it  was  advisable  for  this  company  to  patent  its  new 
processes? 

4.  Do  you  consider  the  original  plan  of  financing 
sound? 

5.  Would  it  have  been  good  policy  to  raise  the  needed 
capital  by  selling  stock  to  ice  manufacturers? 

6.  What  do  you  expect  to  be  the  financial  future  of 
this  company? 


Problem  15 
General  Problem  on  Capitalization  of  Goodwill 

In  recent  years  goodwill  has  been  very  highly  valued 
by  a  number  of  large  concerns  as  a  basis  for  issuing 
common  stock.  Some  outstanding  examples  are  the 
following:  B.  F.  Goodrich  Company,  $57,798,000; 
American  Tobacco  Company,  $54,099,430;  Woolworth 
Company,  $50,000,000;  Liggett  &  Meyers  Tobacco 
Company  (including  trade-marks,  brands,  and  the 
like),  $40,709,711;  Cluett  Peabody  Company,  $18,- 
000,000  (out  of  total  assets  of  $27,759,912). 

Most  of  the  tobacco  and  cigarette  companies  have 
valued  their  goodwill  at  a  high  figure.  This  is  par- 
ticularly true,  also,  of  a  number  of  the  chain  stores 
and   rubber   companies. 

Questions 
1.  When,  if  at  all,  is  it  desirable  to  capitalize  "good- 
will"? 


CHANGES  IN  OWNERSHIP  65 

2.  Does  the  size  of  the  concern  or  the  nature  of  the 
industry  have  any  bearing  on  the  question? 

3.  On  what  basis  can  the  value  of  goodwill  be  prop- 
erly arrived  at? 

(References:  Conyng,tou,  Financing  an  Enterprise,  SiO — 357;  Green* 
dlinger,  Financial  and  Business  Statements,  120-138;  Lough,  Business 
Finance,  191-197;  Simpson,  Capitalization  of  Goodwill,  passim.) 


C.    FINANCING  CHANGES  IN  OWNERSHIP 

Problem  16 

Financing  a  Change  of  Ownership  in  a 

Closely  Held  Concern 

The  following  problem  is  given  by  a  Cleveland 
business  man: 

A  manufacturing  corporation,  long  established,  and 
with  a  profitable  business  on  staple  commodities  in 
every-day  use,  finds  itself  obliged  to  make  some  new 
financial  arrangements.  The  total  assets  of  the  com- 
pany are  about  $2,000,000. 

When  the  company  was  organized  some  thirty-five 
years  ago,  the  stock  was  held  by  ten  or  twelve  different 
stockholders.  From  time  to  time,  as  opportunity 
offered,  the  president  and  treasurer  of  the  company, 
who  are  its  principal  executive  officers,  have  bought 
up  such  stock  as  was  offered,  until  at  the  present  time, 
they  own  practically  all  of  the  stock  of  the  company 
in  equal  shares.  The  treasurer  is  the  younger  man 
of  the  two,  and  has  been  extremely  active  in  the 
management  of  the  company's  affairs.  He  suffered 
from  a  severe  attack  of  nervous  prostration  in  Decern- 


66  PROBLEMS  IN  BUSINESS  FINANCE 

ber,  1919,  and  from  that  time  until  the  present  (Feb.  1, 
1921)  has  taken  no  active  part  in  the  business. 

The  president  was  thoroughly  experienced  in  all 
departments  of  the  business  and  carried  along  the 
duties  of  the  treasurer  during  his  enforced  absence, 
with  the  expectation  that  he  would  sooner  or  later 
recover  and  return  to  his  usual  line  of  work.  He 
appeared  to  gain  considerably  in  health  during  the 
summer  of  1920,  and  there  seemed  every  reason  to 
expect  that  in  a  few  months  he  would  be  back  at  his 
post.  But  on  February  1,  1921,  he  informed  his 
associate  he  had  decided  that  he  did  not  care  to  under- 
take active  business  again,  and  would  prefer  to  sell 
out  his  interest. 

The  president  was  very  loth  to  continue  to  carry 
on  the  business  alone,  as  he  had  himself  expected  to 
retire,  and  had  assumed  that  the  treasurer,  being 
several  years  his  junior,  would  naturally  take  charge 
until  the  younger  men  in  the  employ  of  the  company 
were  fitted  for  the  more  important  positions.  Under 
the  circumstances  the  president  decided  to  offer  the 
business  for  sale,  so  that  both  he  and  the  treasurer 
might  withdraw.  It  was  advertised  in  the  financial 
papers,  and  quite  a  number  of  responses  were  received, 
but  it  was  at  a  time  when  financial  conditions  were 
unfavorable  for  new  investments,  and  the  offers 
received  were  not  interesting.  The  records  showed 
that  the  business  had  been  steadily  profitable,  and  the 
goodwill  was  important,  but  no  capitalists  seemed 
to  be  interested  to  take  over  the  business  on  a  basis 
which  would  recognize  to  the  full  extent  the  actual 
assets  of  the  business. 

The  president  of  the  company  hesitated  seriously 
at  the  thought  of  taking  the  whole  thing  on  to  his 
own  shoulders,  as  the  amount  involved  in  the  purchase 
would  be  large,  and  the  work  and  responsibility  very 
arduous,  at  least  until  such  a  time  as  the  younger  men 
in  the  employ  of  the  company  could  be  fitted  and 
trained  for  the  more  important  duties.  But  as  there 
seemed  no  other  way  to  preserve   the   goodwill   and 


CHANGE  IN  OWNERSHIP  67 

secure  the  full  value  of  the  work  done  for  many  years 
in  building  up  the  organization  and  establishing  the 
quality  of  and  creating  a  demand  for  the  goods 
manufactured,  he  finally  decided  to  undertake  it. 

Practically  all  of  the  property  of  the  president  was 
invested  in  the  stock  of  the  company.  He  had  avail- 
able outside  but  two  or  three  hundred  thousand  dollars 
which  could  be  used  in  the  transaction. 

The  problem  is,  "How  should  this  change  of  owner- 
ship be  financed?"  Conditions  were  such  in  the  money 
market  at  the  time  that  a  sale  of  preferred  stock  was 
out  of  the  question,  except  at  a  serious  sacrifice.  The 
possibility  of  issuing  serial  notes  convertible  after  a 
time  into  preferred  stock  was  also  suggested.  The 
best  of  good  feeling  existed  between  the  officers,  but 
the  retiring  treasurer  felt  that  he  should  have  a  sub- 
stantial part  of  his  investment  in  cash. 

Question 
1.  In  what  manner  could  the  change  be  effected  with 
the  least  disturbance  and  expense? 


Problem  17 

Financing  a  Complete  Change  os  Ownership  Which 

Will    Make    Possible    a    CoNr.NUANCE    of    the 

Policies  or  the  Former  Owners 

The Company    has    been   operated   by   a 

conservative  management  for  many  years.  A  real  good- 
will has  been  created  and  the  equity  of  the  few  stock- 
holders is  very  great,  though  not  much  money  was 
originally  invested  in  the  concern.  ,  The  company  is 
really  a  very  important  ente  prise  in  its  locality,  em- 
ploying more  workers  than  any  other  concern.  The 
townspeople  consider  it  one  of  the  local  institutions  to 
which  they  can  point  with  pride. 


68  PROBLEMS  IN  BUSINESS  FINANCE 

The  men  who  have  been  responsible  for  the  success 
of^this  concern  are  growing  old  and  they  have  no  sons 
or  relatives  who  can  succeed  them  in  the  management. 
Further,  they  hold  the  majority  interest  in  the  stock. 
If  they  should  die  the  concern  would  be  left  wholly 
without  proper  guidance. 

The  problem  now  confronting  these  men  is  that  of  a 
reorganization  or  refinancing  which  will  prevent  the 
concern  from  being  grabbed  and  exploited  by  out- 
siders after  their  death,  and  which  will  insure  against 
any  radical  changes  being  made  in  the  conduct  of  the 
business. 

The  present  managers  have  asked  for  advice  as  to 

e  financial  policy  which  will  be  most  hkely  to  insure 
he  continuance  of  the  business  along  the  lines  which 
have  made  it  a  profitable  and  highly  thought  of  local 
institution. 

Question 

What  steps  would  you  advise  them  to  take  in  order 
to  attain  this  end? 


Problem  18 
Refinancing  to  Effect  a  Change  in  Organization 

The  following  data,  submitted  by  a  well-known  busi- 
ness manager,  show  the  financial  condition  of  a  man- 
ufacturing company  in  1919: 

Statement 

Assets  Liabilities 

Cash $34,323.95  Notes  payable .    $315,000.00 

Liberty  Bonds .       115,000.00  Accounts    pay- 
Notes  and  Ac-                                able .        91,451.76 

counts receiv-  Reserve  for  in- 

.  able 269,801.65  come  tax. . .  .          3,765.00 

Inventories. . .  .      547,960.90  Capital  stock.  .      510,000.00 

Fixed  assets.  .  .      187,015.93     Surplus 241,598.97 

Prepaid  expenses         7,713.30 

Total $1,161,815.73         Total $1,161,815.73 


CHANGES  IN  OWNP]RSHIP  69 

Record  of  Sales  and  Profits 

Sales  Profits 

1916 $    866,210.66  $  77,225.28 

1917 .  .  .  .  • 1,028,940.51  44,490.92 

1918 1,035,251.41  65,190.02 

1919  to  July  16th 859,948.74  122,203.76 

The  business  has  been  very  conservatively  managed. 
The  full  amount  of  depreciation  has  been  written  off 
each  year  and  both  the  inventories  and  the  fixed  assets 
have  been  valued  low. 

This  manufacturing  busirtess  was  originally  started 
by  one  man.  Later  he  took  in  two  partners,  and  the 
partnership  gave  him  notes  to  the  amount  of 
$300,000.  These  notes  were  carried  with  accounts 
and  notes  payable,  and  this  constituted  a  quick  liability 
which  made  the  financial  statement  less  satisfactory 
from  the  standpoint  of  an  investment  banker.  Sub- 
sequently, in  order  to  take  in  two  additional  partners 
who  had  no  money,  the  business  was  incorporated,  and 
$500,000  in  6  per  cent  cumulative  preferred  stock  was 
issued.  Of  this  stock,  $300,000  was  exchanged  for  the 
notes  held  by  the  original  owner.  The  remaining 
$200,000  of  preferred  stock  was  owned  by  the  other 
two  members  of  the  partnership;  $10,000  of  common 
stock  was  issued  and  held  by  the  three  owners  and  the 
two  new  partners.  It  was  provided  that  the  preferred 
stock  should  be  non-voting  so  long  as  the  dividends 
were  paid  regularly. 

At  the  time  of  the  incorporation  a  voting  trust  com- 
posed of  two  of  the  stockholders  was  formed  to  hold 
$200,000  of  preferred  stock  and  all  the  common  stock. 
The  receipts  from  the  dividends  on  this  stock  were  to 
be  used  by  the  voting  trust  to  purchase  the  $300,000 
preferred  stock  held  by  the  founder  of  the  business. 
In  approximately  two  years  $100,000  of  the  preferred 
stock  had  been  retired.  This  leaves  $200,000  preferred 
stock  still  to  be  retired.  The  voting  trust  holds  the 
$100,000  that  has  been  retired,  and  the  dividends  on 
this,  as  well  as  on  the  stock  first  placed  in  the  hands  of 
the  voting  trust,  are  used  for  liquidating  the  remainder 


70  PROBLEMS  IN  BUSINESS  FINANCE 

of  the  preferred  stock.  If  the  present  plan  is  carried 
out,  it  will  take  about  two  years  to  retire  this  sum. 
The  business  is  now  an  absolutely  closed  corporation, 
but  one  of  the  preferred  stockholders  wishes  to  have 
some  plan  adopted  for  refinancing  the  business  in  order 
that  he  may  regain  full  rights  on  his  preferred  stock 
and  dispose  of  it  in  the  open  market.  The  problem  is: 
What  plan  shall  be  adopted  for  refinancing?  The  cur- 
rent rate  of  interest  for  such  securities  as  this  preferred 
stock  is  generally  7  per  cent  at  the  present  time  (1919). 

Question 
What  possible  solutions  of  this  problem  can  you 
suggest? 


D.     FINANCING  THE  EXPANSION 

Problem  19 
Financing  the  Growth  Solely  Out  of  Earnings 

About  three  generations  ago,  an  ambitious  young 
man  who  was  trying  to  make  his  fortune  in  the  jewelry 
business  in  Boston  went  on  a  business  trip  to  New  York 
City.  While  in  the  latter  place  he  found  that  an 
attempt  was  being  made  to  manufacture  jewelry  cases 
of  different  sorts  out  of  fancy  cardboard.  Realizing 
that  there  might  be  possibilities  for  additional  profit 
in  this  side-line,  he  bought  a  quantity  of  cardboard  out 
of  his  cash  in  pocket  and  carried  it  with  him  back  to 
the  home  of  his  father,  who  was  a  shoemaker  in  New 
Hampshire.  Arrangements  were  made  whereby  the 
father,  who  had  not  made  any  particular  success  of 
his  trade,  would  make  up  a  number  of  jewelry  cases 
in  his  own  little  shop,  which  the  son  planned  to  sell 
in  Boston. 


FINANCING  THE  EXPANSION  71 

The  distance  between  the  place  of  manufacture  and 
the  possible  market  was  relatively  great,  because  poor 
means  of  transportation  existed.  Some  market,  how- 
ever, was  found  for  the  goods  turned  out,  so  that  the 
gross  sales  for  the  first  year  amounted  to  two  or  three 
thousand  dollars. 

In  two  or  three  years,  as  the  sales  began  to  increase, 
the  father  found  it  impossible  to  do  all  the  work  by 
hand,  and  accordingly  designed  a  simple  machine  to 
do  the  cutting.  All  the  proceeds  of  the  business  to 
date  were  used  up  in  making  this  machine.  However, 
within  a  short  time  the  sales  increased  pretty  rapidly 
and  some  net  profits  were  made. 

As  the  years  went  on,  various  members  of  the  family 
still  at  home  assisted  in  turning  out  the  goods,  and,  as 
the  scale  of  operations  grew,  the  original  "shop"  was 
extended  to  the  attic  of  the  house  and  finally  to  the 
barn.  As  these  quarters  were  outgrown,  some  of  the 
work  was  parceled  out  to  various  families  in  the  com- 
munity, until  finally  a  considerable  number  of  people 
in  the  adjoining  villages  were  engaged  in  helping  make 
these  jewelry  cases.  This,  of  course,  necessitated  the 
hiring  of  wagons  and  teams  in  order  to  collect  the  goods 
made  by  the  people  in  the  different  localities. 

However,  the  central  factory  was  not  built  until 
about  twelve  years  after  the  first  orders  had  been 
placed.  This  factory  was  paid  for  in  full  out  of  the  ac- 
cumulated earnings  of  the  past,  which  had  resulted 
largely  from  the  activities  of  the  entire  family.  At  this 
time  the  gross  earnings  were  about  $100,000  per  year. 

Questions 

1.  Comment  on  this  method  of  starting  a  business. 

2.  Was  it  desirable  to  have  the  production  carried 
on  so  far  from  the  nearest  market? 

3.  Should  the  factory  have  been  built  sooner? 

4.  Should  money  have  been  borrowed  for  this  pur- 
pose? 

5.  Should  you  expect  a  business  started  in  this  way 
to  prove  successful  or  to  have  a  long  existence? 


72  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  20 

Ford's  Method  of  Financing  Expansion 

AND  Securing  New  Capital 

The  following  paragraph  appeared  in  the  Boston  News 
Bureau  on  January  22,  1921: 

"Mr.  Ford  never  believed  in  finance,  or  banks, 
or  stocks,  or  bonds.  He  wanted  only  one  share- 
holder, and  that  himself,  in  the  Ford  Motor  Com- 
pany. When  his  factory  closed,  he  turned  to 
Finance,  and  Finance  has  turned  to  ask  some 
questions  of  Mr.  Ford.  Indeed,  rumor  is  abroad 
that  Finance  will  dictate.  He  may  call  it  Jew 
Finance  or  what  he  likes;  others  may  call  it  com- 
mon sense  finance." 

In  this  connection  the  following  general  suggestions 
regarding  Ford's  early  methods  of  financing  should  be 
borne  in  mind: 

About  twenty  years  ago,  when  Ford  was  experi- 
menting with  the  possibilities  of  cheap  automobiles, 
he  is  said  to  have  mortgaged  his  house,  used  up  his 
wife's  savings  bank  account,  and  borrowed  some  money 
from  friends.  When  he  finally  succeeded  in  develop- 
ing a  car  which  customers  were  willing  to  buy,  he 
found  himself  with  barely  sufficient  funds  to  buy  the 
needed  material  for  making  one  car. 

Finally  a  company  was  formed  in  1903  with  $28,000 
capital  paid  in,  Ford  himself  owning  about  one-fourth 
of  the  stock.  The  usual  method  of  financing,  how- 
ever, was  the  hand-to-mouth  method,  until  enough 
profits  had  been  earned  to  make  it  possible  to  build 
proper  factories.  Within  a  few  years  after  the  busi- 
ness had  been  incorporated,  the  majority  of  the  stock 
was  held  by  Mr.  Ford  himself,  and  the  remainder  by 
a  very  small  group  of  friends.  In  1919  Ford  bought 
out  all  the  other  stockholders  at  a  price  of  nearly 
$100,000,000. 

He  has  always  been  opposed  to  the  pohcy  of  bor- 
rowing, except  in  recent  years  for  temporary  financ- 
ing.    Due  to  his  unusual  expansion  poUcy,  however, 


FINANCING  THE  EXPANSION  73 

with  a  view  to  "digging  automobiles  out  of  the 
ground"  and  "eHminating  the  middleman,"  it  had 
now  apparentl}''  become  necessary  for  the  company  to 
raise  from  $75,000,000  to  $100,000,000  new  capital. 
The  fact  that  during  the  past  year  or  two  practically 
all  the  old  officials  had  severed  their  connections  with 
the  company,  seemed  to  point  to  something  wrong 
internally.  However,  Ford  himself  denied  that  he 
needed  any  more  funds  and  no  loan  was  effected. 
Incidentally,  it  is  interesting  to  note  that  even 
though  the  total  assets  of  the  company  are  several  hun- 
dred million  dollars,  the  total  amount  of  stock  out- 
standing until  1920  has  never  exceeded  $2,000,000,  and 
there  is  no  bonded  indebtedness.  The  price  of  Ford 
cars  was  reduced  in  the  autumn  of  1920,  while  other 
makers  were  attempting  to  keep  prices  up.  Though 
during  1920  more  cars  were  sold  than  ever  before,  all 
of  Ford's  factories  closed  at  the  end  of  December  and 
remained  closed  for  several  weeks.  Within  two  or 
three  months  after  the  resumption  of  operations,  how- 
ever, the  company  was  turning  out  more  cars  than 
ever  before. 

In  the  Boston  News  Bureau  for  July  14,  1921,  the 
following  eulogy  regarding  Ford's  financing  appeared: 

How  Ford  Turned  the  Corner 

A    Brilliant    Financing    Scheme    Which    Turned 

125,000    Surplus    Cars    Into    Cash— Still   the 

Sensation  of  the  Motor  Industry 

Little  more  than  six  months  ago  Henry  Ford  had  all 
but  completed  arrangements  for  borrowing  $75,000,000  in 
the  face  of  what  appeared  to  be  desperate  necessity.  His 
plants  were  closed,  there  was  little  demand  for  his  cars. 
Ford  owed  the  Government  $55,000,000  in  taxes.  Notes 
for  nearly  $30,000,000,  originally  issued  to  buy  out  his 
minority  partners,  were  due  within  a  few  weeks.  Cash  and 
treasury  bonds  together  aggregated  only  $23,000,000.  Un- 
sold cars  were  piled  high  in  the  factory  and  choking  sales- 
rooms over  the  country.  The  public  was  not  buying  auto- 
mobiles of  any  kind. 


74  PROBLEMS  IN  BUSINESS  FINANCE 

Yet  Ford  did  not  borrow  from  the  banks,  but  paid  them 
up,  and  today  his  sales  are  the  greatest  in  history.  How 
was  the  corner  turned? 

It  was  first  turned  by  transferring  the  load.  Marvelously 
recuperated  markets  completed  the  process.  Ford  pushed 
his  125,000  surplus  automobiles  up  the  hill  off  his  own  inven- 
tory account  and  into  the  hands  of  his  17,000  dealers.  He 
shipped  automobiles  over  the  world  to  willing  and  unwilling 
consignees  and  drew  against  them.  The  tide  of  cash  re- 
turned—S69, 000 ,000  before  April  1. 

He  also  gave  notes  or  acceptances  to  some  extent  for  sup- 
plies and  parts  furnished  when  he  started  up. 

******* 

The  Ford  recovery  was  probably  the  most  inspiring  event 
possible  to  the  motor  industry,  and  the  manner  in  which 
it  was  accomplished  was  most  salutary  to  the  Ford  organ- 
ization. Had  Ford  been  able  to  obtain  the  desired  S75,000,- 
000  without  restrictions  as  to  who  should  ])e  his  treasurer, 
company  extravagances  might  have  continued.  Angered  at 
banker  "dictation"  on  one  hand,  and  advised  by  banker 
friends  on  the  other,  he  decided  to  go  it  alone.  To  make 
the  hill  he  had  to  economize. 

As  a  result,  Ford  combed  his  entire  organization,  and  there 
is  probably  no  more  efficient  industrial  unit  in  the  countrj' 
today.  Where  he  formerly  employed  60,000  men  to  produce 
an  average  of  4,000  cars  daily,  he  now  obtains  an  output 
of  4,500  daily  with  45,000  men.  The  $6  minimum  wage 
had  been  retained,  but  foremen  have  been  put  to  work,  tasks 
doubled  up,  and  adjustments  averaging  20  per  cent  to  25 
per  cent  reduction  made  in  wages. 

A  day  or  two  later  most  papers  wrote  eugolistic 
editorials  about  Mr.  Ford,  stating  that  there  is  "only 
one  Henry  Ford,"  and  so  on.  They  referred  with  great 
approval  to  the  fact  that  he  had  offered  to  purchase  the 
Government's  nitrate  plant  and  water-power  develop- 
ments at  Muscle  Shoals,  Alabama,  caUing  for  an  initial 
payment  of  $5,000,000,  and  the  assumption  of  a  100- 
year  lease  necessitating  an  additional  payment  of 
$1,500,000  annually.  Some  of  the  very  bankers  who 
ridiculed  Ford's  financial  methods  a  few  months  earlier, 
even  suggested  that  he  might  be  able  to  solve  the 
great  problem  of  the  railroads  in  the  United  States, 
since  he  appeared  to  be  effecting  remarkable  economies 
on  the  little  road  which  he  had  bought. 


FINANCING  THE  EXPANSION  75 

Questions 

1.  Do  you  approve  of  Ford's  early  methods  of 
financing? 

2.  What  do  you  consider  to  be  the  strength  or  weak- 
ness of  individual  ownership  of  so  large  a  business? 

3.  In  days  of  business  depression  which  concern  is  in 
the  stronger  position  if  it  seems  advisable  to  stop  pro- 
ducing goods  for  a  time,  the  concern  whose  stock  is 
widely  held  and  quoted  on  the  stock  exchange,  and 
which  perhaps  has  bonds  outstanding,  or  the  concern 
which  is  closely  owned  and  has  no  bonded  indebtedness? 

4.  Do  you  approve  of  the  recent  policy  of  "expan- 
sion" which  appears  to  interest  Henry  Ford? 

5.  How  do  you  account  for  the  diametrically  opposite 
points  of  view  expressed  in  the  papers  at  the  two  sepa- 
rate times? 

6.  What,  in  your  mind,  is  the  real  explanation  of 
Ford's  financial  success? 

7.  Granting  that  Ford  continues  to  follow  his  more 
recently  developed  policies  of  ''expansion"  along  lines 
not  essential  to  effectiveness  in  factory  production, 
what  do  you  think  his  financial  future  will  be? 


Problem  21 

Raising   Fixed   Capital 

Through  a  Novel  Preferred  Stock  Issue 

On  July  6,   1921   the  following  notice  appeared  in 
the  Boston  Transcript: 


76  PROBLEMS  IN  BUSINESS  FINANCE 

Free  from  Massachusetts  Income    Tax  and  Normal 
Federal  Income  Tax 

SI, 250,000 
NEW  ENGLAND  POWER  (X)MPANY 

6%  Cumulative  Preferred  Stock 
Preferred  as  to  earnings  and  assets.      Not  subject  to  call. 

Dividends  payable  quarterly,  January    1,  April  1,  July  1, 
and  October  1st. 

Each  share  now  offered  carries  a  transferable  profit-right 
certificate  calling  for  payment  of  S2.50  additional  to  holder 
each  year  from  July  1,  1921,  to  July  1,  1931,  to  be  paid 
quarterly  out  of  surplus  or  net  earnings  otherwise  avail- 
able  for   common   dividend. 

Outstanding  Capitalization 
(With  that  proposed  to  be  issued) 

First  Mortgage  5%  Bonds $9,054,000* 

Preferred  6%  Stock  (shares  $100  par  value)  5,349,200 

Common  Stock 3,800,000 

♦Including  $186,000  held  alive  in  the  Sinking  Fund. 

Business — The  New  England  Power  Company,  through 
the  New  England  Company  Power  System,  supplies  elec- 
tric power  at  wholesale  in  about  two  hundred  cities 
and  towns  including  Boston,  Providence,  Worcester,  Nashua, 
Fitchburg  and  Fall  River. 

Property — The  New  England  Power  Company  has  five 
hydro-electric  generating  stations  with  capacity  of  about 
48,000  H.  P.  and  with  further  available  development  of  an 
additional  75,000  H.  P.  (This  financing  includes  the  building 
of  plant  No.  9,  which  will  generate  an  additional  5,500  H.  P.) 
The  company  also  owns  250  miles  of  transmission  and  distri- 
bution lines,  together  with  a  reservoir  at  Somerset,  Ver- 
mont, with  a  storage  capacity  of  over  20,000,000,000  gallons. 

Security — The  present  properties  of  the  Company, 
together  with  additional  property  resulting  from  the  pres- 
ent financing,  will  have  a  valuation  over  $5,500,000  in  ex- 
cess of  the  amount  of  bonds  and  preferred  stock  to  be  out- 
standing upon  completion  of  this  financing. 

Earnings — Earnings  for  the  12  months  ended  March 
31,  1921,  were  over  2.93  times  the  preferred  dividend 
requirements. 

Price  $100  and  accrued  dividend  per  share  (with  profit 
rights). 

Yielding  834%  for  ten  years,  and  6%  thereafter. 


FINANCING  THE  EXPANSION 


77 


Questions 

1.  Why  do  you  suppose  this  company  issued  pre- 
ferred stock  under  the  conditions  indicated? 

2.  Would  you   consider    this    to    be   a   satisfactory  ' 
method  of  financing  for  an  industrial  concern?       ^    "^ 

3.  Do  you  think  it  would  have  been  possible  for  the 
average  industrial  concern  to  issue  preferred  stock  in 
this  way  in  1921?     Give  your  reasons. 


Problem  22 

Prospectus  Covering  the  Flotation 
OF  A  Small  Bond  Issue 

January  1921  New  Issue. 

We  Offer  for  Private  Subscription 

$160,000 

FIBREBOARD  COMPANY 

(A  Massachusetts  Corporation) 

First    Mortgage   8%   Sinking   Fund   Coupon    Gold    Notes 
Dated  January  3,  1921  Due  January  1,  1936 

Interest  payable  January  and  July  1st  at  the  Old  Colony 
Trust  Company,  Boston,  Mass. 

Coupon  Notes  in  the  denomination  of  $1,000,  $500  and  $100. 
Registerable  as  to  principal 

Subject  to  redemption  at  100  and  accrued  interest  up  to 
and  including  Jul}^  1,  1926,  and  thereafter  up  to  and  includ- 
ing July  1,  1935,  at  102  and  accrued  interest,  upon  sixty 
days'  notice  from  the  Company,  except  that  the  notes  ma}^ 
be  called  by  lot  for  sinking  fund  purposes  on  any  interest 
date  at  100  and  accrued  interest. 

Old  Colony  Trust  Company,  Boston,  Trustee 


78  PROBLEMS  IN  BUSINESS  FINANCE 

Sinking  Fund 

Tlie  coinpaiiy  asreos  that  until  the  entire  issue  is  retired, 

it  will  pay  on  January  20,  1922,  and  each  month  thereafter, 

a  sufficient  amount  into  the  sinking  fund  so  that  the  entire 

issue  will  have  been  retired  on  or  before  January  1,  1936. 

Summary 

This  issue  of  notes  is  secured  by  an  absolute  first  mortgage 
on  the  entire  property  of  the  company,  now  owned  or  here- 
after acquired,  the  present  appraised  value  of  which  is  over 
3}/2  times  the  amount  of  the  outstanding  notes. 

The  avei'age  net  earnings  for  the  past  seven  j'ears  and 
nine  months  have  been  at  the  rate  of  almost  two  and  one-half 
times  the  interest  requirements  of  this  issue.  The  business 
of  the  company,  as  it  is  to  be  conducted,  should  in  the  opinion 
of  the  management  provide  net  Earnings  of  about  S5  per 
share  on  the  common  stock. 

The  plants  of  the  company  are  so  located  that  it  is  able 
to  supply  its  customers  with  either  large  or  small  orders  at 
a  minimum  transportation  cost  and  with  quick  deliveries. 

The  sinking  fund  requirements  are  sufficient  to  maintain 
a  steady  demand  for  these  notes  in  any  market.  (Provisions 
here  omitted. — Author). 

All  legal  matters  connected  with  this  issue  will  be  ap- 
proved by  Messrs  .  .  .  representing  us,  and  by  Messrs  .  , 
representing  the  Fibreboard  Company.  Copies  of  their 
opinions  will  be  furnished  upon  application. 

Price  and  Yield  (Details  omitted. — Author). 
Under  the  terms  described  above  the  noteholders  cannot 
receive  less  than  8.60%  income  on  t'heir  investment,  if  held 
to  maturity,  and  they  may  receive  a  net  return  as  high  as 
11.70%. 

The  following  information  was  given  in  a  letter  writ- 
ten by  the  president  of  the  company: 

General  Information 
The  Fibreboard  Company  is  the  successor  of  the  Hideite 
Leather  Compaii}'  of  Brockton  and  in  addition  to  that  plant 
has  recently  acquired  a  second  fully  equipped  plant  and 
established  fibreboard  business  at  Amesbury,  Mass.,  so 
that  it  now  owns  two  manufacturing  plants,  each  constituting 
complete  units,  centrally  located  in  the  City  of  Brockton, 
Mass.,  and  in  the  town  of  Amesbury,  Mass.  Each  of  these 
factories  is  of  brick  and  heav}^  mill  construction,  thoroughly 
protected  by  sprinkler  systems,  thus  assuring  the  lowest 
possible  insurance  rates.  The  property  of  the  company  is 
insured  for  a  total  sum  of  not  less  than  S350,000. 


FINANCING  THE  EXPANSION  79 

• 

The  factory  at  Brockton  is  located  on  the  Middleboro 
division  of  the  main  line  of  the  New  York,  New  Haven  & 
Hartford  Railroad.  As  the  company  owns  a  side  track  ex- 
tending the  full  length  of  its  plant  it  can  deliver  raw  material 
into  its  stock  sheds  and  coal  into  its  coal  pocket  at  the  boiler 
room  doors.  This  plant  is  near  to  the  class  of  labor  which  we 
employ  and  is  on  a  street  car  line  running  to  the  center  of 
the  city. 

The  factory  at  Amesbury  is  well  located  in  the  center  of 
the  town  on  the  Powow  River  and  has  two  railroad  side 
tracks  connected  with  the  Boston  &  Maine  Railroad,  thus 
enabling  easy  delivery  of  raw  material  to  the  warehouse  and 
of  coal  at  the  boiler  room  door.  This  plant  is  also  near  to 
the  class  of  labor  which  we  employ. 

The  machinerj^  and  equipment  of  both  plants  are  of 
modern  and  up-to-date  type,  excellent  condition  in  all 
respects,  and  have  recently  been  appraised  at  S333,011. 
The  total  appraised  value  of  real  estate,  buildings,  and  equip- 
ment of  both  factories  is  $488,011. 

Kinds  of  Fibre  Products  Manufactured 

"HiDEiTE  Leather" — The  Company  manufactures 
a  patented  leather  fibreboard.  known  as  "Hideite  Leather," 
which  has  been  used  in  the  manufacture  of  the  better  grade 
of  shoes  in  New  England  for  a  period  of  ten  years.  "Hideite 
Leather"  is  used  principally  for  heel  lifts  to  take  the  place 
of  the  regular  tanned  leathei  lifts,  and  represents  to  the  shoe 
manufacturer  a  saving  of  over  50%  in  the  cost  of  a  corre- 
sponding amount  of  leather  in  the  production  of  the  heel. 
This  percentage  of  saving  is  figured  by  taking  into  con- 
sideration the  normal  cost  of  genuine  leather  used  for  such 
purposes. 

The  patents  protecting  the  manufacture  of  "Hideite 
Leather"  have  been  sustained  in  the  Patent  Courts  of  the 
United  States  and  we  and  those  authorized  by  us  to  do  so, 
are,  and  legally,  can  be,  the  only  producers  of  a  waterproof 
leather  substitute  for  these  purposes  in  the  LTnited  States, 
Canada,  and  European  countries. 

The  following  are  a  few  of  the  shoe  manufacturing  firms 
which  are  large  consumers  of  "Hideite  Leather." 

Churchill  &  Alden  Companj^,  Brockton,  Mass. 
W.  L.  Douglas  Shoe  Compaii}',  Brockton,  Mass. 
P.  B.  Keith  Company,  Brockton,  Mass. 
Whitman  &  Keith,  Brockton,  Mass. 
M.   A.   Packard  Company,   Brockton,   Mass. 
F.  M.  Hoyt  Shoe  Company,  Manchester,  N.  H. 
Rice  &  Hutchins,  Rockland  and  Marlboro,  Mass. 


80  PROBLEMS  IN  BUSINESS  FINANCE 

Hamilton  &  Brown  Shoo  Company,  St.  Louis,  Mo. 
Commonwealth  Shoe  &  Leather  Company,  Whitman, 
Mass. 

This  list  fairly  represents  the  class  of  manufacturers  who 
have  used  this  product  for  j'-ears. 

"Bullseye"  Wadding  Board — This  wadding  board  is 
manufactured  by  us  under  patented  processes  and  will  be 
used  extensively  in  the  production  of  shot  shell  cartridges 
by  such  firms  as  are  mentioned  below.  This  wadding  board 
has  been  thoroughly  tested  by  these  firms  and  found  to  be 
as  good  as  hair  felt  for  over  90%  of  their  purposes  in  the 
manufacture  of  cartridges.  For  the  past  fifty  years,  no  other 
material  costing  less  had  ever  been  found*  that  could  be 
used  with  as  good  results  as  hair  felt. 

The  normal  price  of  the  hair  felt  is  30c  to  35c  per  pound, 
while  the  present  price  of  our  "Bullseye"  wadding  is  15c 
per  pound,  which  represents  a  tremendous  saving  in  the 
production  of  cartridges. 

Since  the  tests  were  completed  bj^  the  following  concerns, 
substantial  orders  have  been  received  from  all  but  one  of 
them,  which  concern  was  under  contract  to  buy  hair  for 
all  its  requirements  until  January  1,  1921: 

Dominion  Cartridge  Company  of  Canada,  Montreal, 
Canada. 

Remington  Arms  and  Union  IVIetallic  Cartridge  Company, 
Bridgeport,  Conn. 

United  States  Cartridge  Company,  Maurer,  New  Jersey, 
and  Lowell,  Mass. 

Western  Cartridge  Company,  East  Alton,  Ilhnois. 

Winchester  Repeating  Arms  Company,  New  Haven,  Conn. 

A  modified  form  of  this  "Bullseye"  wadding  can  also  be 
used  at  a  considerable  saving  for  insulation  purposes,  as 
shown  by  exhaustive  tests  made  by  Prof.  Gordon  B.  Wilkes, 
of  the  Massachusetts  Institute  of  Technology,  as  wel!  as  for 
other  construction  purposes.  This  possible  use  represents  a 
large  outlet  for  this  product. 

Counter  Board — The  "Hercules"  and  "Atlas"  brands  of 
counter  board  are  manufactured  by  this  company  for  use 
extensively  in  the  manufacture  of  boots  and  shoes  as  counters 
instead  of  leather.  These  two  products  are  recognized  in  the 
market  as  being  of  highest  quality  and  there  is  an  increasing 
demand  for  them  among  shoe  manufacturers.  A  counter  made 
from  "Hercules"  or  "Atlas"  brands  costs  the  shoe  manu- 
facturer about  two  cents  a  pair,  as  compared  with  the  cost 
of  a  leather  counter  of  from  eight  to  twelve  cents  per  pair, 


FINANCING  THE  EXPANSION  81 

and  is  entirely  satisfactory  for  the  shoe  worn  by  the  great 
consuming  public. 

The  following  are  a  few  of  the  firms  which  are  extensive 
users  of  the  "Hercules"  and  "Atlas"  brands  of  counter  board: 

The  Appleton  Counter  Company,  Haverhill,  Mass, 

Wm.  E.  Bixby'&  Son,  Haverhill,  Mass. 

Colonial  Counter  Company,  Lynn,  Mass. 

D.  J.  Mulligan  &  Sons,  Salem,  Mass. 

The  Three  Line  Counter  Company,  Newburyport,  Mass. 

Wilkinson  Counter  Company,  Salem,  Mass. 

Record  of  Earnings 

The  business  of  the  Fideite  Leather  Company  was  es- 
tablished in  1907  and  the  present  factory  at  Brockton  was 
constructed  in  1908  and  1909. 

The  record  of  earnings  of  that  company  covering  a  period 
of  seven  years  and  nine  months,  during  which  the  company 
handled  no  war  orders  and  which  reflects  no  profits  from  sales 
of  wadding  board  or  counter  board,  shows  average  annual 
net  earnings  available  for  interest,  dividends,  and  deprecia- 
tion of  S30,912.03,  or  nearly  two  and  one-half  times  the 
interest  requirements  on  this  issue  of  $160,000,  8%  notes. 

Financial  Statement 


Assets 

Liabilities 

Real  Estate  and  Build- 
ings                             $155,000 

Machinery  and  Equip- 
ment                             333,011 

Inventory,  Cash,  etc.       101,200 

Patents,  Processes  and 

Good  Will 250,000 

Common  Shares  22,000 
(no  par  value) 

Preferred    Stock 
(par  value 
$100)                  $335,000 

8%   First   Mort- 
gage Notes 

(this  issue)           160,000 
Serial  Notes              55,000 
Surplus                   289,211 

Total  $839,211  $839,211 

Estimate  for  1921 

In  response  to  your  request  for  an  estimate  of  earnings 
for  the  calendar  year  of  1921,  I  wish  to  state  that  the  average 
output  of  the  Hideite  Leather  factory  for  the  past  nine  years 
has  amounted  annually  to  2,030  tons  of  product,  and  that 
during  the  past  six  months  we  have  been  producing  wadding 
board  at  the  rate  of  500  tons  per  year. 

The  tonnage  of  the  Amesbury  factory  on  "Hercules"  and 
"Atlas"  counter  board  during  the  calendar  year  of  1920  has 
been  at  the  rate  of  1,500  tons  per  year. 


82  PROBLEMS  IN  BUSINESS  FINANCE 

Taking,  as  a  basis  of  figuring,  sales  of  750  tons  of  "Hideite 
Leather,"  oOO  tons  of  wadding,  and  1,750  tons  of  counter 
board,  which  I  beheve  can  be  accomphshed  during  the  year 
1921,  and  using  for  cost  figures  present  prices  of  labor  and 
materials,  I  find  that  after  taking  care  of  all  note  interest, 
sinking  fund  requirements,  depreciation,  dividends  on  pre- 
ferred stock,  but  before  Federal  Taxes,  the  company  should 
show  a  balance  of  approximately  $85,000  for  the  Common 
Stock. 

Return  of  Normal  Business  Conditions 
With  the  return  of  normal  business  conditions  the  output 
of  the  two  factories  should  increase  to  at  least  4,000  tons  per 
year,  in  which  case  this  balance  for  the  Common  Stock  should 
increase  from  $85,000  to  between  $140,000  and  $160,000. 
In  making  this  estimate  no  account  has  been  taken  of 
royalties,  due  from  foreign  "Hideite  Leather"  factories,  or 
of  export  sales  to  foreign  agents. 

Signed 

President. 

Questions 

1.  Analyze  this  prospectus  critically  and  in  detail, 
summing  up  all  the  strong  and  weak  points  of  the 
proposition. 

2.  What  is  your  conclusion  regarding  the  financial 
present  and  future  of  the  company? 

3.  What  do  you  consider  the  essentials  of  a  good 
prospectus? 


Problem  23 
Banker  Control 

One  of  the  partners  in  a  large  and  influential  invest- 
ment banking  house  in  New  York  City  stated  that  his 
organization  would  not  under  any  circumstances  put 
through  any  important  piece  of  financing  without  se- 
curing a  place  on  the  board  of  directors  of  the  refinanced 
concern.  This  he  stated  to  be  the  only  proper  course 
for  them  to  follow  if  they  expected  to  have  those 


FINANCING  THE  EXPANSION  83 

policies  of  sound  management,  for  which  they  prided 
themselves,  carried  out  under  all  circumstances.  By 
insisting  upon  this  sort  of  management  in  connection 
with  their  financing  they  felt  that  they  would  be  in  a 
position  to  see  that  the  various  companies  refinanced 
by  them  lived  up  to  their  obhgations.  Thus  they  feel 
that  they  are  building  up  an  excellent  reputation  with 
the  buyers  of  their  securities. 

One  of  the  members  of  a  large  Boston  private  bank- 
ing firm  at  about  the  same  time  stated  that  it  was 
absolutely  contradictory  to  their  policy  to  let  them- 
selves be  represented  on  the  directorate  of  any  concern 
whose  securities  they  sell.  Even  though  the  companies 
may  insist  on  this  arrangement,  feeling  the  need  of 
sound  financial  advice,  this  banking  house  has  uni- 
formly refused  to  accede  to  such  requests.  They  con- 
sider themselves  ''investment  bankers"  and  not  busi- 
ness managers.  They  are,  however,  always  ready  to 
advise  those  concerns  whom  they  finance  as  to  the 
proper  financial  policies  for  them  to  follow. 

Questions 

1.  With  which  point  of  view  do  you  agree?  State 
the  reasons  for  your  position. 

2.  Would  you  draw  any  distinction  between  an  in- 
vestment bank  and  a  commercial  bank  in  this  matter? 


Problem  24 

Getting    New    Capital 

FOR  AN  Old,  Closely  Owned  Concern 

The  M.  Company,  engaged  in  the  manufacture  of 
enamel-ware,  began  business  in  1903.  It  has  always 
been  largely  a  one-man  concern,  though  incorporated. 
Aside  from  a  small  issue  of  serial  bonds  in  1907,  the 
business  has  been  financed  out  of  earnings  and  out  of 
the  small  original  capital.  The  prosperity  of  this  busi- 
ness was  affected  very  little  by  the  war. 


84  PROBLEMS  IN  BUSINESS  FINANCE 

In  1919  it  was  felt  by  the  management  that  in  order 
to  develop  the  business  properly  it  would  be  necessary 
to  double  the  plant  capacity.  The  original  plant  had 
been  secured  very  cheaply  and  was  hopelessly  anti- 
quated. There  was  not  sufficient  warehouse  room,  nor 
was  it  possible  to  handle  orders  with  sufficient  speed. 
Further,  there  had  heretofore  been  no  very  active  at- 
tempt to  increase  the  volume  of  sales.  On  the  con- 
trary, the  business  had  grown  naturally  and  surely, 
largely  because  of  the  excellent  quality  of  goods  turned 
out.  The  company  has  never  used  its  own  trade- 
mark, and  has  sold  only  to  a  comparatively  few  large 
customers.  It  was  felt,  however,  that  with  the  changed 
business  conditions  following  the  war  it  would  prob- 
ably be  necessary  to  carry  on  the  business  in  much 
larger  volume  and  with  more  aggressiveness,  in  order 
to  make  good  profits. 

Accordingly,  in  1919  the  new  building  campaign  was 
launched  in  spite  of  the  excessively  high  prices,  and 
the  expenses  were  financed  partially  through  an  in- 
crease of  common  stock  very  narrowly  distributed  and 
partially  through  the  sale  of  some  additional  bonds, 
which  had  been  authorized  in  connection  with  the 
earlier  issue.  The  bills  payable  to  banks  increased 
rapidly  during  the  year  1920,  and  these  loans  were  used 
primaril}'^  for  building  purposes. 

The  new  plant  was  finished  late  in  1920.  Though 
the  cost  of  this  additional  construction  was  high,  the 
average  cost  of  all  the  fixed  assets  was  very  moderate 
because  of  low  original  outla3^s.  The  management  feels 
that  very  high  returns  will  be  realized  on  the  added 
investment  as  soon  as  general  conditions  improve. 

It  should  further  be  explained  that  this  business  is 
practicall}^  free  from  the  seasonal  element  and  sells  its 
goods  largely  to  jobbers,  the  usual  terms  being  2 
per  cent  10  days,  60  days  net.  Ordinarily  the  cus- 
tomers discount  their  bills  promptly.  The  volume 
of  sales  for  the  fiscal  year  ending  November  30,  1920, 
was  $1,269,557,  and  the  entire  loss  from  bad  debts  dur- 
ing the  year  was  less  than  1/200  of  1  per  cent. 


FINANCING  THE  EXPANSION  85 

The  cost  of  these  sales  during  the  year,  less  discounts 
on  purchases,  was  $1,087,053.  After  the  various  allow- 
ances for  reserves,  fixed  charges,  etc.,  the  net  profit 
amounted  to  $106,649,  or  more  than  10%  on  the  total 
assets  of  the  business.  It  should  be  stated,  however, 
that  during  the  latter  half  of  1920  the  profit  on  sales 
was  very  much  smaller  than  normal,  due  to  general 
high  expenses. 

Along  in  1921,  the  management  began  to  grow  very 
much  concerned  about  its  relatively  high  floating  debt, 
not  because  there  was  any  present  fear  that  the  banks 
might  cut  down  their  lines  of  credit,  but  because  busi- 
ness was  falling  off,  and  inventory  was  large,  receiv- 
ables were  growing  slower,  and  so  on.  All  in  all,  it 
appeared  in  the  spring  of  the  year  that  by  the  end  of 
1921  the  current  ratio  might  be  dangerously  low  and 
that  it  might  then  be  difficult  to  do  any  new  financing 
if  there  should  be  need  for  it. 

The  following  comparative  and  much  abbreviated 
financial  statements  will  indicate  what  has  happened 
to  the  finances  of  the  company  between  the  end  of  1919 
and  the  end  of  1920,  and  it  must  be  admitted  that  any 
undesirable  changes  shown  have  been  exaggerated  dur- 
ing the  past  six  months: 

Comparative  Statement  of  the  M.  Company 
November  30 

Assets                                   1919  1920 

Real  estate,  buildings,  etc S165,000  $324,000 

Equipment,  machinery,  etc 112,000  185,000 

Goodwill 32,000  32,000 

Inventory 

Raw  materials 132,000  190,500 

Work  in  process 22,000  41,000 

Finished  work 29,000  49,000 

Cash 44,000  24,500 

Liberty  Bonds 10,000     

Accounts  receivable 80,000  130,000 

Bills  and  acceptances  receivable 500  6,000 

Personal  advance 5,000  6,000 

Miscellaneous ^18^000 ^.OOO 

$649,500  $1,010,000 


86  PROBLEMS  IN  BUSINESS  FINANCE 

Liabilities 

Capital  Stock S290,000  S435,000 

Bonds 30,000  98,000 

Surplus 101,000  17,000 

Profit  for  year 86,000  107,000 

Vouchers  payable 14,000  67,000 

Bills  payable 90,000 

Bills  and  acceptances  discounted 4,000 

Dividends  payable 6,500 

Reserved  for  depreciation 56,000  67,000 

Reserved  for  taxes 16,000  50,000 

Miscellaneous  Reserves 39,500  47,500 

Accruals ^      17,000 21,000 

$649,500  $1,010,000 

The  following  alternatives  are  now  being  considered 
by  the  management : 

(a)  Should  the  business  continue  to  finance  itself  on 
the  present  basis,  going  ahead  modestly  and  taking 
a  chance  on  reducing  its  current  indebtedness  in  the 
hope  that  business  will  begin  to  improve  by  the  end 
of  the  year?  If  this  program  were  followed,  there 
would  be  no  further  expansion  of  plant,  though  it  is 
thought  to  be  wise  to  invest  from  $25,000  to  $50,000 
more  in  this  item,  and  no  future  financing  would  be 
contemplated. 

(6)  Shall  an  attempt  be  made  to  secure  additional 
capital  with  a  view  to  taking  up  some  of  the  floating 
indebtedness,  furnishing  more  working  capital,  etc.? 
If  so,  how  shall  this  capital  be  secured  and  how  much 
should  be  secured? 

(c)  Shall  the  concern  struggle  along  as  best  it  can 
until  new  capital  can  be  secured  on  more  favorable 
terms  and  then  do  its  financing? 

Questions 

1.  In  the  light  of  all  the  facts  at  your  disposal,  do 
you  believe  that  the  expansion  was  justified  at  this  time? 

2.  Accepting  the  situation  as  it  novv  is,  what  financial 
policy  should  you  advise  the  management  to  follow? 

3.  If  you  agree  that  there  should  be  new  financing, 
what  method  would  you  advise  taking? 


FINANCING  THE  EXPANSION  87 

Problem  25 
Securing  More  Capital  for  a  New  Concern 

The  following  problem  was  received  from  the  presi- 
dent of  a  newly  organized  company  in  February,  1921 : 

The  writer  has  organized  four  successful  selling 
agencies,  the  latest  one  of  which  was  the  New  York 

territory   for    the Machine    Company. 

This  firm  manufactures  and  distributes  the 

Package  Sealer,  used  in  stores  for  dispensing  a  properly 
moistened  piece  of  gummed  paper  tape  for  the  sealing 
of  parcels,  and  the  like. 

The  machine  is  rather  complicated  for  the  ordinary 
clerk,  as  it  contains  a  lever,  cutting-off  knife,  gears, 
pawl  movement,  etc.,  that  give  more  or  less  trouble 
which  the  ordinary  clerk  cannot  adjust,  thus  necessi- 
tating the  return  of  the  machine  to  the  factory  for 
repairs.  The  selling  price  of  this  machine  is  $28, 
which  is  prohibitive  to  the  small  concern. 

The  writer  invented  a  new  tape  machine,  which 
will  retail  for  about  $10,  do  all  the  work  that  the 
above  mentioned  machine  can  do,  do  it  more  quickly, 
with  practically  no  chance  of  the  machine's  getting 
out  of  adjustment,  because  of  its  simplicity.  Fifty- 
two  points  were  applied  for  in  the  patent  application, 
of  which  fourteen  were  allowed,  thus  making  what  is 
termed  a  100%  patent. 

The  writer  then  oiganized  a  corporation,  incor- 
porated under  the  laws  of  the  State  of  New  Jersey, 
with  a  capitalization  of  1,500  shares,  par  value  $50, 
all  common  and  non-assessable.  He  accepted  $3,000 
in  stock  for  his  patent  rights.  For  selling  the  stock  of 
the  company  and  to  maintain  the  majority  holdings 
of  stock  in  the  company  he  is  given  one  share  of  stock 
for  each  share  sold.  The  present  standing  of  the 
company  is  as  follows: 


88  PROBLEMS  IN  BUSINESS  FINANCE 

Stock  of  tape  (used  in  the  machines) 

on  hand $1,530.86 

Office  fixtures 325.00 

Cash  in  bank 779.39 

Cash  on  deposit  with  manufactur- 
ing concern 100.00 

Accounts  receivable 200.00 

Notes  payable S800.00 

Capital  stock 11,800.00 

Patent  rights,   operating   expense, 
incorporating  expense,  patterns, 

etc 9,665.00 

$12,600.00      $12,600.00 

Approximately  $1,300  will  pay  for  three  dies  needed 
to  make  die-cast  tanks,  rollers  and  platen.  This  will 
also  include  the  first  1,000  of  each  of  these  castings. 
After  the  cost  of  the  dies  has  been  taken  care  of,  it 
will  cost  approximately  bbi  for  the  three  castings 
for  each  machine.  The  first  1,000  machines  complete, 
ready  for  sale,  will  cost  approximately  $3.50,  and  after 
the  first  1,000,  in  1,000  lots  the  machines  will  cost 
approximately  $2.75  each.  The  condition  of  the  com- 
pany at  present  is  such  that  we  need  more  money  to 
carry  on.  After  the  first  thousand  machines  are  sold 
and  the  second  thousand  are  being  sold,  we  shall  need 
money  to  continue  the  business  unless  purchasers  are 
prompt  in  paying  their  invoices. 

I  have  arranged  with  a  foundry  and  machine  shop 
combined  to  manufacture  machines  and  deliver  to  me 
completed  machines  ready  for  sale  at  the  cost  of  about 
$3.00.  If  I  were  equipped  to  manufacture,  or  rather 
to  assemble  machines  from  material  from  foundry,  I 
could  reduce  the  cost  of  the  machine  to  approximately 
$2.25.  The  cost  of  an  assembling  plant  would  be 
approximately  $2,000  for  outlay,  and  a  weekly  expense 
of  about  S200  extra.  I  estimate  that  inside  of  one  year 
1,000  machines  a  week  would  be  the  output. 

A  bank  has  signified  its  interest  and  may  loan  us 
some  money  on  "accounts  receivable."  I  am  practic- 
ally certain  of  about  $1,000  more  coming  in  from  the 
sale  of  stock  within  a  week  or  two.     The  less  stock  we 


FINANCING  THE  EXPANSION  89 

have  out,  the  more  profit  there  will  be  for  the  stock- 
holders. The  company  has  been  embarrassed  for  lack 
of  cash  because  about  $700  of  the  owner's  money  has 
been  tied  up  for  several  months  in  a  bank  which  failed. 

I  have  been  a  successful  master  mechanic,  a  success- 
ful sales  manager,  and  have  invented  several  successful 
articles  that  did  not  bring  me  any  great  remuneration 
because  I  was  under  contract.  I  have  tried  to  step 
aside  here  and  build  up  a  business  for  myself,  for  I  am 
now  48  years  old.  I  am  convinced  that  I  have  an 
article  of  real  merit,  as  it  has  been  demonstrated  to  the 
three  largest  possible  users  of  such  devices,  who  have 
given  it  their  unquaUfied  indorsement.  The  limit  of 
my  own  and  my  wife's  personal  resources  have  been 
invested  in  the  company,  and  I  have  resigned  from  the 
New  York  managership  of  the  other  company  at  a 
salary  of  $10,000  a  year  to  play  this  game.  I  have 
been  offered  and  have  refused  $20,000  for  60  per  cent 
of  the  capital  stock. 

In  this  connection  I  should  explain  that  I  already 
have  a  good  market  for  gummed  tape,  which  I  handle 
as  a  jobber.  As  my  machine  is  sold  it  will  logically 
follow  that  the  purchasers  will  also  buy  gummed  tape 
from  me.  On  this  tape  there  is  a  very  good  profit, 
and  I  have  already  made  an  agreement  with  one  of  the 
largest  gummed  tape  producers  in  the  country  to  supply 
me  with  all  the  tape  that  I  wish.  I  also  have  had  reg- 
istered a  trade  name  for  a  special  quick-drying  tape 
which  is  being  prepared  for  me  and  which  should  be  in 
great  demand. 

Should  I  try  to  operate  on  the  smaller  capital,  of 
course  getting  some  more  stock  out,  say  $5,000,  or 
should  I  get  busy  and  sell  enough  stock  to  get,  say, 
$20,000  or  $25,000  more  with  which  to  operate? 
Selling  stock  at  present  would  take  time,  delay  produc- 
tion, and  the  results  would  be  uncertain,  while  expenses 
would  continue.  Expenses,  by  the  way,  have  been 
reduced  to  a  minimum  and  the  actual  cash  output 
each  month  is  under  $300. 


90  PROBLEMS  IN  BUSINESS  FINANCE 

In  other  words,  should  I  concentrate  on  production 
or  on  capitaUzing? 

My  idea  on  marketing  the  machine  was  to  make  a 
trip  through  the  country,  appointing  general  agents 
on  a  commission  basis  in  some  places  and  appointing 
wholesale  paper  jobbers  as  distributors  in  others. 
The  machine  should  cost  (manufacturing  and  packing) 
about  $3,  and  to  my  thinking  should  sell  to  the  general 
agent  for  S5.50,  to  the  sub-agent  for  $6.50,  and  should 
retail  for  $10,  5  per  cent  off  in  lots  of  10,  10  per  cent 
off  in  lots  of  25,  15  per  cent  off  in  lots  of  50,  and  25 
per  cent  off  in  lots  of  100. 

What  would  be  your  suggestion  for  marketing? 

Quesiiojis 

1.  In  view  of  the  information  given,  do  you  think 
that  the  launching  of  this  new  enterprise  is  financially 
justified? 

2.  Granting  that  the  machine  is  all  that  is  claimed 
for  it,  what  steps  should  you  advise  the  president  to 
take  in  order  to  insure  financial  success? 

3.  What  are  your  answers  to  his  specific  questions? 

4.  Do  you  think  that  the  present  president  is  the 
right  man  to  head  the  concern? 


Problem  (26 
General  Problem  in  the  Financing  of  a  Company- 
Making  Patent  Cap.s  and  Jar  Covers 

The  following  interesting  problem  is  submitted  bj' 
the  manager  of  the  E.  Z.  Lid  Company: 

The  E.  Z.  Lid  Company  manufactures  a  patent  cap 
or  cover  for  bottles,  jars,  cans,  and  the  like.     These 


FINANCING  THE  EXPANSION  91 

covers  are  a  marked  improvement  on  any  now  used  for 
similar  purposes,  and  the  more  important  ones  are 
covered  by  patents  which  expire  in  1930.  The  prod- 
ucts have  been  on  the  market  for  two  years.  The 
company  buys  containers  to  sell  along  with  the  covers. 

Officials  of  the  company  feel  that  a  great  potential 
market  exists  for  their  product,  but  in  order  to  secure 
the  proper  volume  of  business  it  will  be  necessary  to 
inaugurate  an  extensive  campaign  of  national  adver- 
tising and  increase  their  manufacturing  facilities.  All 
of  these  things  would  require  a  considerable  amount 
of  new  capital.  It  is  understood  that  their  chief 
competitor  spends  a  quarter  of  a  million  dollars  each 
year  on  advertising  alone. 

Sales  have  held  up  well  during  the  period  of  depres- 
sion. During  1920  orders  were  received  amounting  to 
$135,000.  However,  because  of  difficulties  in  obtaining 
containers — especially  glass  containers — from  the  fac- 
tories supplying  them,  the  gross  sales  were  reduced  to 
only  $100,000.  This  unfortunate  difficulty  in  securing 
containers  was  the  result  of  unusual  business  conditions, 
and  should  not  be  a  normal  situation. 

Owing  to  the  cost  of  obtaining  business  and  the 
expenses  attendant  upon  promoting  a  new  commodity, 
this  volume  of  sales  ($100,000)  was  not  sufficient  to 
produce  any  profit.  In  fact,  because  of  the  relatively 
high  sales  and  advertising  expenses,  the  deficit  last 
year  amounted  to  $12,017.  It  is  estimated  that  about 
four  times  this  volume  of  sales  could  be  handled  with 
only  a  slight  increase  in  present  operating  and  overhead 
expenses,  under  which  circumstances  net  profits  on 
sales  would  be  about  25  per  cent. 

The  line  carried  by  this  company  is  being  added  to 
from  time  to  time.  The  last  addition,  an  improved 
fruit  jar  cover,  has  promise  of  a  big  market  when  its 
superior  features  have  been  made  generally  known. 
In  spite  of  all  the  difficulties  encountered,  the  officers 
of  the  E.  Z.  Lid  Company  have  great  faith  in  the  future 
of  the  business,  and  are  working  for  smaller  salaries 
than  could  be  obtained  elsewhere. 


92  PROBLEMS  IN  BUSINESS  FINANCE 

The  company's  balance  sheet  for  December  31,  1920, 
was  as  follows: 

Balance  Sheet  of  the  E.  Z.  Lid  Company  as  of 
December  31st,  1920 

Assets 
Current  Assets 

Cash  in  bank $9,895.64 

Petty  cash  on  hand.  .  .  .  368.13 

Accounts  receivable. . .  .  29,706.59 

Notes  receivable 40,000.00 

Upressit   Cap   Co.    of 

Canada,  Ltd 104.00 

Total  Current  Assets.  $80,074.36 

Working  and  Trading 

Assets 

Raw  materials — glass- 
ware— advertising 
matter — moulds,  etc..  -32,366.25 

Fixed  Assets 

Patents  (U.  S.) $4,148,068.69 

Drawings 2,454.32 

Machinery 23,223.06 

Dies 9,341.76 

Tools 575.61 

Factory  fixtures 2,195.49 

Office  furniture  and  fixt.  2,649.87 

Trade-mark 75.00 

$4,188,583.80 
Deferred  Charges  to 

Expenses 

(Packing  and  shipping 
material — office  sup- 
plies —  insurance, 
taxes  and  commissions 
paid  in  advance,  etc.)  5,678.2S 

Total  Assets $4,306,702.69 

Net  Loss— 1920 12,017.89 

Total  Assets $4,318,720.58 

Liabilities 

Accounts  payable $12,555.13 

Capital  stock 

Common .$4,000,000.00 

Preferred  (outstanding).         275.000.00     4,275,000.00 
(Authorized 
$1,000,000.00) 
Treasury  stock  subscribed 

and  paid* 31,165.45 

Total  LiaUlities..  .. $4,318,720.58 

*Treasury  stock  subscribed  and  unpaid,  $70,389.55. 

Par  Value 
Preferred  stock,  $100.  Common  stock,  $10. 


FINANCING  THE  EXPANSION  93 

The  company,  having  in  the  last  few  months  received 
payment  on  the  "Treasury  stock  subscribed  and  un- 
paid for,"  now  has  close  to  $75,000  in  cash,  this 
reserve  being  necessary  to  tide  them  over  the  present 
business  depression.  The  management  of  the  E.  Z.  Lid 
Company  now  raises  some  of  the  following  questions: 

Questions 

1.  What  suggestions  can  you  make  regarding  the 
desirability  of  launching  this  company  early  in  1919? 

2.  What  light,  if  any,  does  the  above  balance  sheet 
throw  in  the  problem?  What  criticisms  have  you  to 
offer? 

3.  Would  it  be  more  desirable  for  this  company  to 
endeavor  to  raise  additional  capital  and  to  continue 
to  operate  independently,  or  to  be  taken  over  as  a 
subsidiary  by  some  large  going  concern,  as  for  example 
the  American  Can  Company. 

4.  Granting  that  you  approve  of  the  continued 
independent  operation  of  tlie  company,  what  plans 
can  you  suggest  for  securing  adequate  funds  for  the 
necessary  advertising  campaign  and  the  extension  of 
manufacturing  facilities? 

5.  Do  you  think  it  wise  for  the  company  to  buy 
containers  to  be  sold  along  with  its  covers?  Why  do 
you  suppose  the  company  does  this? 

6.  Again,  assuming  that  the  company  is  to  be 
independently  operated,  should  you  advise  them  to 
continue  buying  the  glass  jars  and  containers  from 
other  concerns,  manufacturing  only  the  caps  and 
covers,  or  should  the  company  avoid  a  recurrence  of 
the  situation  which  confronted  them  last  year,  by 
beginning  to  manufacture  containers  as  well? 

7.  As  an  impartial  adviser,  what  further  suggestions, 
if  any,  can  you  make  as  to  the  past,  present,  and 
future  financing  of  the  company? 

8.  How,  if  at  all,  would  your  answers  to  the  above 
questions  differ  if  you  were  an  officer  of  the  E.  Z.  Lid 
Company? 


94  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  27 

An  Expansion  Which  Necessitates  a  Change  in 

Organization 

Mr.  H.,  an  official  of  a  large  New  England  paper 
company,  the  D.  Company,  is  heavily  interested  in  a 
small  paper  mill  operated  by  two  or  three  partners. 
Unless  the  mill  is  considerably  enlarged  there  is  little 
hope  of  receiving  more  than  a  moderate  return 
on  the  investment  in  the  future,  though  war-time 
earnings  were  very  large,  and  the  present  financial 
position  is  excellent.  H.  asked  his  auditor  for  a  re- 
port on  the  proposed  new  financing,  and  received  the 
following  analysis  in  reply: 

Memorandum  to  Mr.  H., 

"I  have  made  a  careful  analysis  of  the  financial 
requirements  for  building  the  M.  Paper  Company  to 
a  two-machine  paper  mill.  We  have  very  definite  fig- 
ures covering  the  requirepients  in  the  way  of  cash, 
notes  receivable,  inventories,  plant,  etc.,  from  the  D. 
Company's  reports.  It  is  comparatively  easy,  there- 
fore, to  set  up  a  balance  sheet  which  should  represent 
the  financial  requirements  of  a  business  of  the  size  you 
mentioned.  Having  arrived  at  these  figures  in  this 
manner,  we  are  able  to  check  them  very  definitely  by 
the  engineering  data  furnished  by  Mr.  Y.  (chief 
engineer),  and  by  other  means,  and  I  believe  that 
the  balance  sheet  presented  herewith  would  closely 
approximate  the  financial  condition  of  the  company 
after  reorganization.  As  you  will  note,  the  plant 
would  be  carried  at  a  value  of  $2,500,000.  This  is 
upon  the  basis  of  the  present  valuation  of  $1,000,000 
as  placed  upon  the  plant  by  the  present  owners,  and 
the  addition  of  two  machines  with  all  the  subsidi- 
ary machinery  required,  at  an  estimated  cost  of 
$1,500,000. 

The  financing  required  to  attain  this  condition  would 
be  exceedingly  difficult,  due  to  the  fact  that  it  would 
be  almost  entirely  a  construction  proposition.  In  other 
words,  the  present  business  as  carried  on  by  the  M. 


FINANCING  THE  EXPANSION  95 

Paper  Company  would  not  justify  the  raising  of  $2,000, 
000,  either  in  the  form  of  bonds  or  stock  issues.  It  is 
perfectly  evident  that  no  banks  would  be  inclined  to 
loan  the  money  upon  any  security  which  the  M.  Paper 
Company  as  an  organization  has  to  offer.  It  seems 
to  me  that  probably  the  only  way  in  which  you  could 
secure  the  required  money  would  be  to  secure  the  sup- 
port of  interests  who  are  familiar  with  the  business 
and  with  the  opportunity  which  exists  for  its  develop- 
ment. 

If  this  is  not  possible,  a  bond  issue,  consisting  of 
construction  bonds  to  be  paid  in  instalments  as  the 
work  progresses,  would  probably  float  it.  You  would 
find,  however,  that  the  cost  in  the  form  of  premiums 
and  interest  would  probably  be  prohibitive.  Preferred 
stock  might  be  disposed  of  if  you  could  secure  sub- 
scriptions from  interested  parties  for  a  large  percentage 
of  the  issue,  thus  offering  to  the  public  only  a  small 
part  for  subscription.  The  D.  Company  might  be 
persuaded  to  take  a  block  of  such  stock,  and  the 
distributors  a  portion. 

Either  of  the  three  methods  outlined  would  result 
in  securing  $2,000,000  of  outside  capital,  $1,500,000  of 
which  would  be  used  to  build  plant,  and  the  other 
$500,000  to  furnish  working  capital  to  carry  on  the 
business. 

I  have  prepared  operating  statements  showing  the 
results  of  operations  after  the  installation  of  the  neces- 
sary machinery,  based  upon  an  output  of  18,000  tons 
of  paper  per  year,  and  9,000  tons  of  soda  pulp,  at  present 
selling  prices  of  paper  and  at  7  cents  per  pound  for 
soda  pulp. 

Analysis  of  the  cost  of  manufacture  indicates  that 
at  present  prices  for  raw  material  and  labor,  and  with 
reasonable  efficiency,  paper  could  be  manufactured  at  a 
cost  which  would  net  about  20  per  cent  on  sales.  As 
will  be  seen  from  the  operating  statements,  corporate 
requirements,  allowing  common  stock  dividends  of  10 
per  cent,  preferred  stock  dividends  of  8  per  cent,  and 
with  provision  for  the  retirement  of  the  preferred  stock 


96  PROBLEMS  IN  BUSINESS  FINANCE 

in  10  years,  would  be  $560,000.  In  addition  to  this, 
Federal  Taxes  would  have  to  be  met.  The  figures  shown 
are  based  upon  different  percentages  of  profit,  and  you 
will  note  that  net  profits  would  have  to  be  maintained 
at  20  per  cent  or  better  in  order  to  meet  corporate  re- 
quirements, and  to  leave  any  surplus  for  improvement 
of  the  corporation's  financial  condition.  It  is,  of  course, 
a  fact  that  the  prefeiTed  dividend  requirements  would 
be  constantly  reduced  until  they  finally  disappear  at 
the  end  of  ten  years,  so  that  a  profit  of  even  15  per  cent 
on  sales  would  in  two  or  three  years  show  up  very  favor- 
ably, and  at  the  end  of  ten  years  would  leave  the  cor- 
poration in  excellent  financial  condition.  In  the  lower 
part  of  the  table  you  will  find  the  corporate  requirements 
based  upon  a  6  per  cent  common  stock  dividend,  7  per 
cent  preferred  stock  dividend,  and  a  sinking  fund  of  5 
per  cent.  Upon  this  basis  it  is  evident  that  earnings 
might  drop  as  low  as  10  per  cent,  based  on  the  selling 
prices  mentioned,  and  still  leave  the  corporation  in  fair 
shape.  In  this  case  it  is  also  true  that  the  condition 
would  be  better  year  by  year  as  the  preferred  stock  was 
retired,  until  at  the  end  of  twenty  years  the  preferred 
would  be  entirely  eliminated,  the  entire  equity  in  the 
business  resting  in  the  common  stock,  and  the  financial 
condition  of  the  corporation  being  very  good. 

It  must  be  borne  in  mind  in  talking  of  a  reorgani- 
zation upon  any  such  basis  as  this,  that  the  net  return 
to  the  present  owners  of  the  business  is  not  apt  to  be 
as  large  as  at  present,  due  to  the  fact  that  considerable 
sums  of  money  would  be  withdrawn  from  the  business 
in  the  form  of  preferred  dividends,  which  amounts  are 
now  distributed  to  the  owners  of  the  business.  It  is 
also  a  fact  that  due  to  the  very  low  valuation  at  which 
the  plant  now  stands,  and  due  to  the  very  peculiar 
arrangement  with  the  D.  Company,*  the  capital  in- 
vested in  the  business  is  very  small  for  the  business 
done.  Due  to  the  present  high  cost  of  construction, 
the  amount  of  capital  required  to  produce  the  added 

*The  D.  Company  manages  the  M.  Company,  and  affords  nvmier- 
ous  facilities  at  low  cost. 


FINANCING  THE  EXPANSION  97 

sales  in  the  form  of  paper  is  entirely  out  of  proportion. 
The  new  Corporation  would  find  itself  with  a  very  heavy 
capitalization  for  the  amount  of  business  which  it  would 
then  do.  This,  of  course,  adds  to  the  fixed  charges, 
and  means  that  the  net  earnings  which  could  be  with- 
drawn would  be  correspondingly  reduced. 

Another  factor  which  must  be  borne  in  mind  is  that 
as  at  present  organized  there  are  no  fixed  requirements 
in  the  form  of  preferred  dividends,  sinking  funds  and 
taxes.  Thus  if  poor  years  are  encountered  no  particu- 
lar harm  is  done.  As  a  matter  of  fact,  as  at  present 
organized,  a  loss  for  any  one  year  for  the  M.  Paper 
Company  could  be  deducted  from  your  other  income  on 
your  personal  tax  returns  and  the  Government  would 
thus  pay  a  part  of  the  loss.  This  would  not  be  true  of  a 
corporation.  A  loss  in  any  year  means  that  preferred 
dividends  would  accumulate,  sinking  funds  could  not  be 
met,  and  these  would  constitute  a  preferred  liability,  and 
the  common  stock  equity  would  be  impaired.  No  part 
of  the  loss  could  be  deducted  in  submitting  tax  returns. 

This  preliminary  memorandum  cannot,  of  course, 
be  expected  to  cover  all  the  phases  of  the  proposition, 
but  may  be  of  some  value  and  interest  to  you. 

Balance  Sheet  of  M.  Company 
(After  proposed  new  financing) 

Cash,  Accounts  and  Cash,  Accounts  and 

Notes   Receiv-  Notes  Payable .  $    500,000 

able S    500,000  Capital   Stock 

Inventory 500,000  Com.  $1,000,000 

Plant 2,500,000  Pref .   2,000,000  3,000,000 

13,500,000  $3,500,000 

Estimated  Operating  Statement 

Gross  Sales— Paper  18,000  tons  @  $200 $3,600,000 

Pulp      9,000  tons  @    140 1,260,000 

$4,860,000 

Gross  Sales. . .  .$4,860,000  $4,860,000  $4,860,000  $4,860,000 
Per  cent  of 

Profit 25 20 15 10 

Net  Profit $1,215,000     $972,000      $729,000     $486,000 


98  PROBLEMS  IN  BUSINESS  FINANCE 


A.   Requirements: 

Dividends — 

Common  @ 

10% 

$100,000 

$100,000 

$100,000 

$100,000 

Dividends — 

Pref.@.8% 

160,000 

160,000 

160,000 

160,000 

Sinking  Fund 

@  10%... 

200,000 

200,000 

200,000 

200,000 

Taxes 

407,400 

295,920 

183,500 

92,980 

Total 

$867,400 

$755,920 

$643,500 

$552,980 

Available  for 

Corp.  Use . 

$347,600 

$216,000 

$85,500 

$66,980 

B.   Requirements: 

Dividends — 

Common 

@6%.... 

$  60,000 

$  60,000 

$  60,000 

$  60,000 

Dividends — 

Pref.(aj7% 

140,000 

140,000 

140,000 

140,000 

Sinkina;  Fund 

@5%.... 

100,000 

100,000 

100,000 

100,000 

Taxes 

407,400 

295,920 

183,500 

92,980 

Total 

$707,400 

$595,920 

$483,500 

$392,980 

Available   for" 
Corp.  Use...    $507,600      $376,080      $245,500       $93,020 

Questions 

1.  Has  the  auditor  in  his  report  considered  all  phases 
of  the  problem? 

2.  In  view  of  the  information  given  in  the  memo- 
randum, what  action  do  you  advise  Mr.  H.  to  take? 

3.  Do  you  see  any  better  methods  of  financing  than 
those  suggested  by  the  auditor? 

4.  What  would  have  been  your  advice  if  the  date 
were  1910  instead  of  1921? 


FINANCING  THE  EXPANSION  99 

Problem  28 

Financing  an  Expansion  which  Necessitates 

A  Change  in  the  Nature  of  the  Business 

The Company   of   Philadelphia,    engaged 

largely  in  the  manufacture  of  cardboard  packing  cases, 
began  as  a  small  undertaking  owned  by  three  men  just 
before  the  war.  The  owners  were  poor  business  men 
and  grew  very  much  discouraged  with  the  undertaking, 
though  their  earnings  had  been  reasonably  good.  Early 
in  1917  a  fourth  man,  Mr.  B.,  then  37  years  of  age, 
who  had  little  money  but  who  had  a  good  general  knowl- 
edge of  this  kind  of  business,  was  taken  into  the  organi- 
zation. After  several  months  it  became  evident  to  B. 
that  the  business  could  not  prosper  with  so  many  dif- 
ferent hands  in  the  management,  nor  did  he  have  any 
confidence  in  the  capacity  of  tlie  men  who  had  originally 
started  the  business.  Consequently,  he  decided  if  pos- 
sible to  secure  the  sole  control  of  the  concern.  The 
financial  statement  of  the  business  in  the  spring  of 
1917  was  as  follows: 

Liabilities 
Capital  Stock^       $11,125.00 
Notes  payable  2,500.00 

Accounts  payable      6,794.50 
Surplus    (mostly 
earned  the  year 
before)         '  8,865.08 

$29,284.58 

1.  Of  this  amount,  $4,000  was  bad. 

2.  Of  this  amount  $9,200  had  been  paid  In  cash. 

Mr.  B.  already  owned  some  stock  in  the  company, 
and,  although  his  outside  personal  resources  at  the  time 
amounted  to  less  than  $1,000,  he  was  able  with  this  sum 
to  make  an  advance  payment  to  one  of  the  other  owners, 
who  agreed  to  sell  out  his  stock.  The  balance  was  to 
be  paid  in  notes  over  a  period  of  time.  In  this  way 
B.  secured  the  controlling  interest  in  the  business. 
Having  once  secured  control,  it  was  not  a  difficult  mat- 
ter for  him  to  induce  the  remaining  owners  to  sell  out 
to  him.     Though  B,  found  it  necessary  to  strain  his 


Assets 

Equipment 

$5,775.64 

Merchandise 

In- 

ventory 

Cash 

11,050.34 

Receivables' 

1,240.05 
11,218.55 

$29,284.58 

100  PROBLEMS  IN  BUSINESS  FINANCE 

credit  to  the  limit  and  to  ''kite"  a  few  checks  with 
friends  in  order  to  effect  this  change  in  ownership,  the 
deal  was  finally  put  through  and  B.  became  the  sole 
owner,  with  a  number  of  personal  notes  yet  to  pay. 
By  allowing  himself  a  high  salary,  as  sole  owner,  he 
soon  secured  sufficient  funds  to  pay  off  these  notes. 

Through  personal  connections,  B.  managed  to  secure 
the  trade  of  several  large  manufacturers  who  agreed 
for  the  immediate  future  to  bu}''  the  greater  proportion 
of  their  boxes  from  him.  Much  attention  was  paid  by 
the  new  company  to  "personal  service"  and  to  making 
the  kind  of  goods  which  would  appeal  particularly  to 
the  consumer. 

During  the  next  three  years  the  business  grew  rapidly. 
The  number  of  employees  grew  from  less  than  40  to 
about  200,  the  gross  sales  increased  from  S68,000  in 
1917  to  $281,331  in  1920,  the  net  worth  increased  from 
about  $20,000  at  the  end  of  1917  to  more  than  $40,000 
at  the  end  of  1920,  while  the  production  and  selling  costs 
were  actually  kept  lower  than  in  most  competing  con- 
cerns. The  owner  did  his  own  selling  through  personal 
contacts.  In  the  meantime  very  liberal  allowance  had 
been  made  for  depreciation  and  the  owner  had  been 
paying  himself  a  salary  of  $12,000  a  year,  all  with  a 
view  to  avoiding  high  income  taxes. 

In  the  early  part  of   1921   the Company 

began  to  feel  the  effects  of  the  general  business  depres- 
sion. Since  it  depended  almost  solely  for  its  income 
on  the  patronage  of  a  few  manufacturers  whose  busi- 
ness was  now  practically  at  a  standstill,  it  was  now 
in  a  particularly  precarious  position.  In  the  first  place, 
most  of  the  customers  were  in  financial  difficulties  for 
one  reason  or  another,  and  found  it  almost  impossible 
to  pay  their  bills.  Further,  those  customers  who  were 
not  actually  in  serious  financial  straits,  found  their 
sales  so  much  curtailed  that  they  could  give  only  small 

orders  for  packing  cases.     As  a  result,  the 

Company  found  it  difficult  to  meet  its  own  bills,  as  it 
had  always  financed  itself  on  a  very  close  margin  of 
working  capital.     It  became  necessary  to  put  off  the 


FINANCING  THE  EXPANSION  101 

less  urgent  creditors  by  means  of  notes  and  promises, 
and  to  pay  only  those  who  threatened  suit  in  case  of 
non-payment.  The  following  statements  show  the  more 
recent  financial  history  of  the  company: 

Assets 

Dec.  31  Dec.    31  Mar.   31 

1919          1920  1921 

Cash $  2,340  $       588  $     1,617 

Accounts  receivable 9,475        16,596  29,609 

Merchandise 25,365        54,888  44,464 

Liberty  Bonds 2,000  

Machinery,  fixtures,  etc 17,130  ^6^  37,546 

Total S56,210    $108,336    $113,236 

Liabilities 

Notes  payable $18,951  $     7,344  $  16,144 

Accounts  payable 24,021  61,652  48,632 

Reserve  for  taxes 4,963  3,868 

Capital  Stock  Common 11,125  1,925  1,925 

"      Preferred 15,600  15,600 

Surplus 2,113  16,852  27,067 

Total $56,210    $108,336    $113,236 

In  the  second  quarter  of  1921  business  began  to  fall 
off  very  rapidly,  until  the  owner  felt  that  the  company 
would  no  longer  prosper  unless  the  business  could  be 
more  widely  diversified.  It  did  not  appear  that  there 
would  be  any  speedy  recovery  in  the  demand  for  pack- 
ing cases  on  the  part  of  his  present  clients,  particularly 
in  view  of  the  fact  that  sales  to  his  type  of  customer 
are  always  low  during  the  summer  months. 

Accordingly,  B.  endeavored  to  discover  some  kind 
of  product  to  which  his  organization  might  profitably 
be  turned  either  as  a  temporary  side-line  or,  more  de- 
sirably, as  a  permanent  part  of  the  business.  He  now 
has  two  or  three  definite  projects  in  mind.  The  possi- 
bility which  seems  to  him  most  feasible  is  that  of  making 
cigar  boxes  out  of  specially  prepared  heavy  cardboard, 
which  he  could  ''process"  in  his  own  factory,  but  no 
attempt  has  yet  been  made  to  patent  this  process.  Upon 
investigation  he  has  found  that  cigar  manufacturers 


102  PROBLEMS  IN  BUSINESS  FINANCE 

can  use  the  type  of  box  which  he  plans  to  make  as  a 
substitute  for  the  usual  wooden  boxes,  at  a  very  great 
saving.  He  further  finds  that  several  important 
manufacturers  of  cigars  are  ready  to  contract  with 
him  for  their  entire  supply  of  boxes  for  the  year,  if 
he  can  soon  be  in  a  position  to  furnish  them. 

In  order  to  develop  this  new  line  of  work,  which  it 
appears  would  be  highly  profitable,  it  will  be  necessary 
to  raise  additional  capital  of  about  $200,000.  The 
problem  at  present  confronting  B.,  who  is  now  thor- 
oughly convinced  that  it  will  be  to  his  financial  ad- 
vantage to  undertake  the  new  business,  is,  "How  in 
the  middle  of  1921  can  he  raise  the  necessary  capital 
for  expanding  and  changing  his  present  organization?" 
Unfortunately  he  has  no  close  friends  on  whom  he  can 
call  for  financial  assistance,  and  his  health  is  very  un- 
certain. 

Questions 

1.  What  is  your  estimate  of  B.  's  financial  ability  and 
of  the  financial  soundness  of  his  business  at  present? 

2.  Do  you  think  that  B.  's  present  business  should  be 
refinanced  in  any  way? 

3.  Do  you  think  it  wise  for  B.  at  this  time,  to  expand 
his  business  in  the  direction  indicated? 

4.  Granting  that  you  favor  this  expansion,  what 
appears  to  you  to  be  the  best  method  of  securing  the 
needed  funds? 


FINANCING  THE  EXPANSION  103 

Problp:m  29 

Shall  a  Small  Concern  Expand  Quickly 

During  a  Period  of  Rising  Prices? 

The Company  was  a  small  concern  en- 
gaged in  manufacturing  a  staple  commodity.  Its 
growth  had  been  slow  and  sure.  During  the  war  there 
was  a  sudden  increase  in  the  demand  for  its  product 
and  there  seemed  to  be  excellent  opportunities  for 
slightly  changing  the  nature  of  the  enterprise  in  such 
a  way  as  to  lead  to  enormous  profits. 

The  management  of  the  company,  seeing  their  various 
competitors  putting  themselves  in  a  position  to  get 
more  business,  decided  that  the  only  policy  for  them 
to  follow  was  to  expand  and  seize  their  profits  while 
prices  were  still  climbing.  They  were  not  content  to 
expand  gradually  out  of  their  large  war-time  earnings, 
but  wanted  to  sell  bonds  or  notes  if  possible.  They 
hoped  in  this  way  to  be  able  to  trade  on  their  equity 
and  make  higher  profits,  since  the  small  number  of 
present  owners  would  not  be  possible  if  they  financed 
by  means  of  stock  issues. 

The  concern  was,  however,  really  too  small  for  a 
bond  issue  or  a  note  issue,  as  general  purchasers  could 
not  be  interested  in  the  proposition.  Nor  was  it  large 
enough  to  interest  outsiders  in  a  new  stock  issue,  for 
not  more  than  $200,000  additional  investment  was 
actually  needed.  So  far  as  a  preferred  stock  issue  was 
concerned,  the  company  did  not  have  a  record  of  earn- 
ings extending  far  enough  back  to  assure  financing  by 
this  method.  It  would  have  been  necessary  to  float 
such  an  issue  on  the  security  of  prospective  profits 
after  the  new  organization  was  effected,  instead  of  on 
the  security  of  past  ''performance"  when  the  company 
was  small.  It  should  also  be  stated  that  the  company 
was  using  its  credit  to  the  limit  with  its  banks  and 
tradespeople,  so  that  no  temporary  help  could  be  ex- 
pected from  these  sources. 

Confronted  by  this  situation,  desirous  of  expanding 
quickly,  but  uncertain  of  the  best  method  of  doing  so, 
the  company  approached  a  private  banking  house  for 


104  PROBLEMS  IN  BUSINESS  FINANCE 

advice.  At  the  same  time  they  stated  that  from  their 
point  of  view  a  sale  of  preferred  stock  would  seem  to 
be  the  most  satisfactory,  all  things  considered. 


r.Af/^"'.^-      J  Questions 

1 1   0 


^       ^^  r        ^^"--l.  Should  such  a  concern  have  attempted  to  expand?' 
f^*^  "  2.  Granting  that  the  expansion  was  desirable,  what 

method  of  financing  should  the  bankers  have  suggested 
to  them? 

3.  If  the  concern  had  wished  to  increase  its  profits 
by  a  slight  change  in  the  nature  of  the  business  carried 
on,  so  as  to  take  up  a  more  profitable  line,  would  your 
answers  to  the  foregoing  questions  be  the  same? 

4.  Are  there  considerations  other  than  financial  which 
might  have  justified  the  expansion  during  the  war? 


Problem  30 

Expanding    a    Garment    Manufacturing    Concern    to 
Take  Over  a  Textile  Mill  in  1919 

The Overall  Company  had  for  a  number 

of  years  been  noted  for  its  conservative  and  shrewd 
management.  They  had  put  the  minimum  amount  of 
money  into  plant  and  equipment,  consistent  with  a  high 
degree  of  efficiency  in  production.  They  always  took 
advantage  of  their  discounts  in  buying  material.  They 
always  collected  their  receivables  promptly,  and  upon 
the  whole  had  an  excellent  standing  among  bankers  in 
different  sections  of  the  country. 

The  company's  investment  in  fixed  assets  was  only 
$200,000  at  the  end  of  1918.  In  1920,  however,  it 
appeared  from  their  statement  that  their  fixed  capital 
had  increased  to  more  than  $1,000,000,  though  there 
was  practically  no  increase  in  their  gross  sales.    Accord- 


FINANCING  THE  EXPANSION  105 

ingly,  one  of  the  bankers  made  inquiry  regarding  the 
matter  and  was  informed  by  the  president  of  the  com- 
pany that  they  had  found  it  necessary  to  buy  one  of 
the  textile  mills  which  had  been  supplying  them  with 
cloth  for  making  the  overalls. 

The  company's  explanation  of  this  move  was  to  the 
effect  that  the  concern  from  which  they  had  been  buy- 
ing always  drove  hard  bargains  with  them  and  prac- 
tically forced  them  to  contract  for  a  large  amount  of 
material  well  in  advance  of  the  company's  needs. 
Finally,  the  textile  concern  had  insisted  that  the  over- 
all makers  agree  to  take  all  of  their  annual  output  dur- 
ing the  year  1920.  Otherwise,  business  relations  be- 
tween the  two  would  be  severed.  Therefore,  owing  to 
the  uncertainties  of  the  business,  the  management  of 
the  overall  company  decided  that  it  would  be  best  to 
buy  out  the  textile  concern,  and  so  be  free  to  conduct 
their  business  along  their  own  lines.  The  president 
further  explained  that  it  was  at  the  time  (late  in  1919) 
extremely  difficult  to  secure  satisfactory  material  at 
reasonable  prices  from  any  other  mill. 

Questions 

1.  Analyze  critically  the  wisdom  of  the  expansion 
policy  followed  by  the  overall  company,  and  the  reasons 
given. 

2.  How  would  you  have  advised  the  management? 


Problem  31 

Financing  the  Expansion  of  a  Conservative  Paper 

Company  in  the  Post-War  Period 

The Paper  Company  was  an  old-fashioned 

concern  which  had  been  under  the  same  family  manage- 
ment for  many  years.  It  operated  on  a  small  scale, 
although  it  was  a  somewhat  integrated  industry,  owning 


106  PROBLEMS  IN  BUSINESS  FINANCE 

some  timberlands  for  the  supply  of  its  pulp  mill.  The 
plant  was  rather  old-fashioned,  but  good.  They  had 
apparently  always  been  making  a  good  return  on  their 
investment.  Their  credit  was  the  highest  possible  for 
a  concern  of  their  size  and  type. 

When  the  boom  in  the  paper  business  came  during 
the  war  period,  with  rapidly  mounting  prices,  a  good 
deal  of  pressure  was  brought  to  bear  to  induce  them  to 
enlarge  their  plant,  so  that  they  might  accept  more 
orders  and  get  a  larger  proportion  of  the  business.  For 
two  or  three  years  they  withstood  this  pressure,  mean- 
while operating  their  plant  to  its  utmost  capacity  and 
making  extraordinarily  high  returns  on  their  invest- 
ment. Yet  their  actual  and  potential  customers,  on 
account  of  the  goodwill  which  attached  to  the  high 
grade  of  paper  put  out  by  them,  continued  to  urge 
orders  upon  them.  Finally,  therefore,  they  felt  that 
circumstances  beyond  their  control  were  forcing  them 
to  expand,  and  decided  to  build  their  plant  greater  in 
order  to  take  more  of  the  business  which  was  being 
thrust  upon  them. 

As  a  result  of  their  decision,  a  program  was  out- 
lined, which  called  for  the  acquisition  of  more  timber- 
lands,  more  water  power,  and  a  considerably  increased 
plant.  These  plans  began  to  be  carried  into  effect  late 
in  1919. 

There  was  no  funded  indebtedness  of  any  kind  against 
the  old  plant,  though  some  preferred  stock  was  out- 
standing. The  company  had  also  built  up  a  very  large 
surplus  out  of  past  earnings,  much  of  which  was  kept 
in  a  liquid  condition.  Consequently,  though  the  ex- 
pansion ultimately  called  for  a  more  than  doubled 
investment  in  fixed  assets,  they  were  able  in  the  begin- 
ning to  finance  themselves  by  means  of  their  large  cash 
resources  and  by  extensive  borrowing  from  their  banks, 
who  at  first  raised  no  objection,  because  of  the  initial 
high  current  ratio  which  their  statements  showed,  and 
because  of  their  excellent  standing  in  the  past. 

In  1920,  as  the  general  depression  came  in  this 
industry,  the  current  assets  of  the  company,  while  still 


FINANCING  THE  EXPANSION  107 

relatively  good,  became  more  or  less  frozen.  Further, 
the  banks  were  no  longer  in  a  position  to  be  able  to 
loan  as  extensively  as  heretofore  for  what  appeared  to 
be  largely  a  capital  expenditure.  As  a  matter  of  fact, 
the  company's  construction  program  was  launched 
at  a  time  when  prices  of  needed  materials  and  labor 
were  at  the  peak,  but  when  the  demand  for  the  com- 
pany's goods  was  soon  to  decline.  However,  all  the 
people  engaged  in  similar  lines  of  industry  thought  that 
the  high  prices  for  paper  would  continue  for  at  least 
two  years,  and  they  could  see  no  clouds  on  the  horizon. 

The  next  step  was  to  float  a  mortgage  loan  secured 
bj'-  their  plants  and  timberlands  at  the  1920  valuations. 
They  had  little  difficulty  in  convincing  the  engineers 
and  investment  bankers  who  handled  the  proposition 
that  it  was  a  very  desirable  piece  of  financing,  and  the 
larger  part  of  the  issue  was  immediately  sold  without 
much  trouble. 

It  now  became  evident  that  the  money  raised  by  this 
mortgage  would  not  be  sufficient  to  pay  off  all  their 
bank  obligations  and  provide  the  necessary  additional 
funds  for  construction  and  working  capital.  Costs  were 
greater  than  had  been  expected.  Accordingly,  before 
the  entire  issue  of  bonds  had  been  sold,  they  were 
forced  to  attempt  to  raise  additional  capital.  This 
they  tried  to  do  by  means  of  an  issue  of  short-time, 
high-interest-bearing  notes  which  had  an  attractive 
sinking-fund  provision. 

While  they  were  in  the  midst  of  these  transactions, 
the  bottom  rather  suddenly  fell  out  of  the  paper  market. 
Prices  were  considerably  cut  by  the  larger  concerns, 
and  the  independents  were  forced  to  follow  suit.  This 
company,  therefore,  found  itself  with  a  still  unfinished 
expansion  program  on  its  hands,  borrowing  from  its 
banks  beyond  any  safe  limit,  and  with  some  of  its 
senior  securities  still  unsold.  An  appeal  was  then  made 
to  the  stockholders  to  furnish  the  needed  working 
capital  by  subscribing  to  junior  securities,  and  a  little 
money  was  raised  in  this  way. 


108         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  In  view  of  the  fact  that  all  of  this  company's 
financial  advisors  decided  that  it  would  be  in  a  stronger 
position  in  every  way  after  the  expansion  was  carried 
through,  do  you  think  this  paper  company  was  justified 
in  expanding  at  the  time  it  did? 

2.  Granting  that  you  approve  of  the  extension,  do 
you  approve  of  the  method  used  to  secure  the  needed 
funds?     If  not,  what  alternatives  would  you  suggest? 

3.  When  the  paper  market  broke,  what  different  pol- 
icy, if  any,  should  have  been  followed  by  this  company? 

4.  If  you  were  called  upon  to  outline  the  future 
financial  policy,  what  would  be  your  advice? 

5.  In  the  light  of  the  data  supplied,  what  do  you 
expect  to  be  the  financial  future  of  this  company? 


Problem  32 
Shall  a  Concern  Own  Real  Estate  or  Pay  Rent? 

The Candy  Company  is  a  concern  which 

until  the  war  period  grew  slowly  and  always  had  the 
reputation  of  being  very  conservatively  managed.  Its 
product  is  of  the  highest  grade  and  has  been  sold  on 
the  strength  of  quality  rather  than  by  means  of  high- 
pressure  advertising.  No  real  estate  was  owned,  but 
a  rather  antiquated  building  had  for  some  years  been 
rented.  By  operating  in  this  fashion,  the  overhead  had 
been  kept  very  low,  so  that  this  company  w^as  one  of 
the  most  advantageously  situated  in  the  trade.  It  was 
a  source  of  considerable  annoyance,  however,  to  find 
that  in  the  rush  season  work  could  not  be  comfortably 
carried  on  in  these  quarters,  and  as  the  volume  of 
business  grew,  it  was  frequently  necessary  to  turn  away 
some  orders  because  of  the  congestion.  Further,  the 
owners  of  the  building  would  lease  the  property  only 
by  the  year  and  were  constantly  raising  the  rent. 


FINANCING  THE  EXPANSION  109 

In  volume  of  sales,  the  business  of  this  company  grew 
about  as  follows:  1913,  $450,000;  1914,  $525,000; 
1915,  $600,000;  1916,  $720,000;  1917,  $850,000;  1918, 
$995,000;  1919,  $1,250,000. 

Because  of  the  greatly  increased  sales  figure 
toward  the  end  of  1919,  the  management  began  to 
think  that  the  company  was  at  last  going  to  come  into 
its  own,  particularly  since  this  result  had  been  achieved 
with  practically  no  general  advertising.  It  was  further 
perfectly  evident  that  the  old  rented  quarters  would  be 
wholly  inadequate  if  the  business  should  expand  any 
more.  At  its  utmost  capacity  the  old  plant  could  not 
turn  out  under  present  price  conditions  more  than 
$1,300,000  worth  of  product.  With  the  more  normal 
prices  which  might  ultimately  be  expected,  the  output 
would  have  been  limited  to  about  $900,000.  Also,  it 
was  felt  that  much  valuable  goodwill  was  being  lost 
because  of  the  unavoidable  delays  in  filling  orders,  as 
well  as  because  of  the  orders  which  actually  had  to  be 
turned  down.  If  the  demand  should  continue  at  the 
present  rate,  it  seemed  to  the  management  that  their 
sales  for  the  year  1920  would  be  in  excess  of  $1,500,000, 
and  many  expected  that  the  $2,000,000  mark  would  be 
reached. 

In  view  of  these  considerations,  it  was  decided  to 
build  a  plant  which  would  insure  sufficient  capacity 
under  all  conditions.  As  this  company's  credit  was 
excellent,  there  was  little  difficulty  in  raising  $250,000 
additional  capital  by  an  issue  of  preferred  stock.  Of 
the  amount  received  it  was  planned  that  $150,000 
should  go  into  the  plant  and  the  balance  was  to  be 
used  for  additional  working  capital.  It  was  also  esti- 
mated that  at  least  $400,000  profits  could  be  made 
during  the  year  1920,  which  would  put  the  company 
in  a  very  strong  position  with  the  banks  and  enable 
it  also  to  retire  some  of  the  preferred  stock.  As 
the  work  progressed  during  the  year,  it  was  found  that 
more  working  capital  was  needed  than  had  been  antici- 
pated, so  that  the  concern  had  to  borrow  about  $500,000 
from  the  banks,  at  the  peak,  instead  of  $250,000  or 


no         PROBLEMS  IN  BUSINESS  FINANCE 

$300,000  as  had  ])een  customary.  Further,  it  was  found 
that  when  all  allowances  were  made  the  building  would 
necessitate  an  increase  in  fixed  assets  of  at  least  twice 
as  much  as  had  been  originally  planned  for. 

Hence,  after  the  sale  of  the  preferred  stock,  instead 
of  having  an  increased  amount  of  working  capital  the 
company  was  forced  to  draw  on  its  former  cash  balance 
to  the  extent  of  $50,000  for  building  purposes,  as  well 
as  to  use  some  of  its  bank  borrowings  for  the  same 
purpose.  The  net  earnings  expected  during  the  year 
did  not  materialize.  There  was  an  inventory  shrinkage 
of  about  $45,000,  and  during  the  last  two  months  of 
the  year  an  actual  loss  in  operation  of  $30,000  was 
incurred.  The  volume  of  sales  for  the  year  had  dropped 
considerably  below  the  volume  for  the  preceding  year, 
and  the  surplus  resulting  from  many  years  of  con- 
servative management  was  largely  wiped  out. 

The  first  of  the  year  1921  saw  the  company  in  its 
new  quarters.  By  this  time  it  was  realized  that  in 
order  to  break  even,  with  its  new  plant,  the  company 
would  need  gross  sales  of  at  least  $1,500,000.  Yet 
not  only  had  prices  now  fallen  greatly,  but  the  demand 
which  had  the  year  before  been  thought  permanent 
seemed  to  grow  constantly  less.  During  the  first 
five  months  of  1921  there  was  an  actual  loss  in  operation 
of  $150,000.  It  appears  that  this  loss  will  continue 
until  the  autumn,  after  which  time,  with  reasonable 
luck,  an  even  break  may  be  expected  until  January.  It 
is  very  probable  that  the  volume  of  sales  for  the  year 
will  not  exceed  $750,000.  In  the  meantime,  the  com- 
pany owns  a  very  superior  plant,  has  no  fear  of  rent 
increases,  and  has  a  good  deal  of  extra  space  which 
might  profitably  be  leased. 

Questions 

1 .  What  are  the  chief  lessons  to  be  derived  from  this 
episode? 

2.  What  steps  should  you  advise  the  company  to 
take  in  order  to  improve  its  financial  position? 


FINANCING  THE  EXPANSION  111 

Problem  33 
How  Fast  is  it  Safe  for  a  Business  to  Grow? 

The  Standard  Parts  Company  is  a  manufacturer 
of  various  automobile  and  vehicle  accessories.  Its  prod- 
ucts are  also  used  by  many  other  industries,  including 
manufacturers  of  metal  furniture,  machine  tools,  metal 
beds,  electrical  appliances,  go-carts,  chandeliers,  and 
the  like.  According  to  the  published  balance  sheets, 
the  assets  of  this  company  increased  more  than  50 
per  cent  in  the  last  six  months  of  the  year  1917.  This 
increase  is  indicated  as  follows: 

General  Balance  Sheet  of  Standard  Parts  Co. 

Dec.  31,  •    May  31, 

Assets—                                              1917  1917 

Property  account $9,430,723  $9,960,618 

Sundry  securities  owned,  etc 142,548  47,356 

Patents  and  licenses 1,317,813       

Goodwill,  contracts,  etc 3,11.0,972       

Marketable  securities 134,284       

Other    permanent    investments, 

stocks  of  other  companies,  etc.  .     2,179,855  2,110,467 

Inventories 6,300,518  3,741,769 

Accounts  receivable 2,212,017  1,125,309 

Cash 1,043,059  194,405 

Notes  receivable 106,134  74,653 

Deferred  assets 172,726 68,339 

$26,150,649  $17,3227916 


Liabilities — 

Common  stock $13,112,599  $8,661,800 

Preferred  stock 6,798,700  5.551,800 

Notes  payable 2,245,783  272,610 

Patent  liability 178,200       

Accrued   payrolls,   taxes  and  divi- 
dends   286,870  180,323 

Accounts  payable 943,864  736,814 

Depreciation  and  reserves 447,568  1,207,214 

Capital  surplus 10,000       

Appropriated  surplus 750,000       

Profit  and  loss 1,377,065  712,355 

$26,150,649  $17,322,916 


112  PROBLEMS  IN  BUSINESS  FINANCE 

In  January,  1918,  the  president  of  the  Standard  Parts 
Company  wrote  as  follows  on  the  subject  of  "Making  a 

Small  Business  Big" :      (System,  January  1918,  p.  21  ff.) 

"I  entered  business  eleven  years  ago  with  a  cash 
capital  of  $100,  and  $55  of  this  was  spent  for  lawyers' 
and  incorporation  fees;  we  began  making  automobile 
springs  in  an  abandoned  smithy.  Today  we  have  a 
$35,000,000  corporation  owning  and  operating  thir- 
teen plants.  Why  and  how  did  we  grow  so  quickly? 
Is  there  anything  supernatural  in  the  transit  from 
single  dollars  to  millions? 

The  difference  between  big  business  and  little 
business  is  largely  one  of  vision.  The  bars  to  success 
are  commonly  self-made." 

He  sums  up  under  the  following  heads  the  principles 
which  seem  to  him  most  significant  in  connection 
with  the  growth  from  a  small  to  a  large  business : 

"I.  Business  secrets  are  of  the  past;  the  corporation 
taking  a  vote  on  an  action  that  could  not  be  spread 
broadcast  is  ill-managed,  for  good  management  con- 
notes fair,  open  dealing. 

II.  The  fellow  who  has  a  little  business  calls  himself 
a  small  business  man,  wants  to  know  only  about  other 
small  business  men,  and  dismisses  the  lessons  from 
larger  affairs  with  the  remark,  'That's  all  right  for 
him — he's  a  big  fellow,  but  it  won't  do  for  me,'  is  the 
'man  destined  for  petty  concerns. 

III.  Some  men  think  that  I  am  too  willing  to  try 
out  something  new,  and  I  have  been  severely  criticized 
at  times  for  making  expenditures  for  the  future,  but 
I  will,  as  a  fundamental  principle,  spend  any  amount 
within  reason  in  the  prospect  of  shortening  the  work 
and  thus  saving  in  the  end. 

IV.  Striving  for  cheapness  at  the  expense  of  quality 
is  an  earmark  of  little  business.  Nothing  need  to  be 
'put  across'  on  other  than  its  merit  in  the  concern  which 
has  a  through  ticket  for  the  larger  affairs. 


FINANCING  THE  EXPANSION  113 

V.  Money  is  a  business  tool — and  nothing  more. 
Translate  money  into  terms  of  what  it  will  buy  and 
you  have  the  real  rule  for  figuring  its  worth. 

VI.  I  thought  for  some  years  that  everything  had 
to  pass  over  my  desk.  I  worked  in  the  office  until 
eight  or  nine  o'clock  in  the  evening  and  reached  home 
dog  tired.  It  was  only  gradually  that  I  learned  that 
the  business  was  not  bound  up  in  me  and  that  others 
could  take  over  certain  responsibilities." 

The  subsequent  history  of  this  concern  may  be  briefly 
summarized  as  follows.  In  the  latter  part  of  1919, 
there  were  rumors  that  the  Standard  Parts  Company 
was  not  being  well  managed,  that  its  cost  accounting 
system  was  inadequate,  that  it  had  been  trying  to  carry 
on  too  large  a  business  for  its  capital,  and  so  on.  Its 
credit  with  its  banks  was  very  seriously  impaired. 

In  a  signed  statement  under  date  of  December  31, 
1919,  the  president  of  the  company  having  stated  that 
in  some  of  their  operations  they  were  losing  money, 
and  having  attributed  the  loss  partly  to  the  post-war 
competition,  and  partly  to  the  shortage  of  working  cap- 
ital over  a  period  of  years,  said : 

"The  president  assumes  full  responsibility  for  the 
management  of  the  business,  and  any  failure  must  be 
charged  to  him," 

On  February  16,  1920,  the  management  accordingly 
changed  hands.  It  was  found  that  the  operating  loss 
for  the  year  1919  had  been  $1,611,349,  which  had  been 
increased  to  $2,444,238  as  a  result  of  the  payment  of 
unearned  dividends. 

In  spite  of  the  change  of  management,  a  receiver 
was  appointed  for  this  company  on  September  4,  1920. 

After  numerous  attempts  at  reorganization,  the  fol- 
lowing notice  appeared  on  April  14,  1921: 

"On  April  12,  1921,  the  creditors  of  the  Standard 
Parts  Company  approved  a  reorganization  plan  pro- 
viding for  a  new  company  to  have  $1,000,000  preferred 
stock,  par  $100,  and  125,000  shares  no  par  common 


114  PROBLEMS  IN  BUSINESS  FINANCE 

stock,  and  $6,500,000  mortgage  notes  maturing  Janu- 
ary 1,  1924.  The  old  stockholders  will  have  the  right 
to  purchase  new  notes  and  common  stock  within 
ninety  days  of  this  offer." 

On  June  17,  1921,  the  following  statement  was  made: 

"On  June  15,  1921,  the  stockholders  of  the  Standard 
Parts  Company  voted  down  the  plan  of  reorganization 
proposed  by  the  creditors.  Both  preferred  and  com- 
mon stockholders  agreed  to  hold  out  for  an  extension 
of  the  receivership  until  the  depression  ends." 

Questions 

1.  Was  the  launching  of  this  enterprise  financially 
justified? 

2.  Do  you  agree  with  the  ''principles"  of  growth  laid 
down  by  the  president  of  the  Standard  Parts  Company? 

3.  From  the  facts  given  regarding  this  company's 
career  up  to  1918,  should  you  have  expected  it  to  con- 
tinue to  be  a  financial  success? 

4.  What  are  your  own  theories  regarding  the  financial 
policy  of  this  corporation? 

5.  How  fast  is  it  safe  for  a  business  to  grow? 

(Reference:     System,  August,  1921,  p.  145  ff.) 


Problem  34 
Financing  the  Expansion  and  the  Contraction 

The  following  statement  was  made  in  July  1920: 

"The  scramble  of  corporations  doing  a  large  volume 
of  business  on  borrowed  money,  to  get  in  out  of  the 
wet,  as  the  banks  gradually  curtailed  credit  accommo- 
dations in  the  last  six  months,  is  reflected  in  the  tre- 


FINANCING  THE  EXPANSION  115 

mendous  volume  of  the  new  financing  which  has  been 
done  in  that  period.  These  corporations  have  tried 
two  methods  of  making  themselves  secure  against  a 
calling  in  of  their  bank  loans  at  maturity.  They  have 
invited  more  partners  into  the  concern,  or  have  bor- 
rowed money  from  investors  for  long-term  periods. 

During  the  first  six  months  of  1920,  corporate  finan- 
cing broke  all  records,  as  to  number  of  new  securities 
and  amounts.  The  aggregate  reached  $2,117,066,470, 
against  11,124,475,325  in  the  same  period  of  1919.  In 
the  full  year  of  1919,  new  financing  aggregated  $2,944,- 
988,000,  the  record  figure  up  to  that  time.  Financing 
may  drop  off  considerably  during  the  balance  of  the 
year  and  yet  set  up  a  new  record  for  twelve  months. 

A  feature  of  this  year  is  the  comparatively  small 
amount  used  for  refunding,  6.4  per  cent  against  21.8 
per  cent  in  the  first  six  months  of  1919. 

The  largest  part  of  new  money  this  year  was  for 
expansion  of  industrial  corporations,  principally  oil  and 
motor  industries.  Considerable  financing  was  also 
necessarj^  to  obtain  additional  working  capital  by  reason 
of  high  prices  of  raw  material  and  other  commodities." 

The  new  financing  for  1920  is  said  to  have  reached 
an  aggregate  of  $3,322,264,000,  of  which  nearly  $2,400,- 
000,000  was  by  industrial  concerns. 

During  the  first  four  months  of  1921,  the  total 
amount  of  corporate  financing  reported  is  $1,040,547,- 
000.  Of  this  amount,  about  35  per  cent  is  said  to 
have  been  for  refunding  purposes,  much  of  which  was 
a  forced  refunding  brought  about  by  the  protective 
provisions  of  earlier  security  issues  which  required  a 
definite  minimum  ratio  of  net  quick  assets  or  the  like. 
The  balance  of  the  financing,  while  stated  to  be  for 
"new  capital,"  was  almost  solely  emergency  financing 
with  a  view  to  securing  additional  working  capital 
needed  to  maintain  the  current  position  or  to  pay  off 
mercantile  and  bank  creditors  during  the  period  of 
inventory  shrinkage,  order  cancelations,  and  general 
business   depression. 


116         PROBLEMS  IN  BUSINESS  FINANCE 

Question 
What  significant  relations  exist  between  the  financing 
of  1919-1920  and  the  financing  of  1921? 


E.    FINANCING  MORE  OR  LESS  DOUBTFUL 
UNDERTAKINGS 

Problem  35 
Floating  a  New  Automobile  Company  in  1920 

In  1920  the  Pan  Motor  Company,  a  Minnesota 
corporation,  sold  stock  to  some  54,000  persons,  from 
whom  the  promoters  received  the  aggregate  sum  of 
$4,723,811.  Of  this  amount  nearly  $1,200,000  was  paid 
to  salesmen  in  commissions.  Over  $650,000  was  re- 
tained by  the  boss  promoter  for  his  services  as  fiscal 
agent,  and  over  $500,000  went  for  advertising  and  other 
expenses,  so  that  nearly  one-half  the  receipts  were 
absorbed  in  getting  the  money. 

Questions 

1.  What  do  you  expect  the  future  of  this  company 
to  be?     '     ' 

2.  Would  your  answer  be  different  if  the  company 
had  been  launched  in  1910? 

3.  Taking  the  long-run  point  of  view,  how  do  you 
think  an  automobile  company  should  be  financed? 
Give  your  reasons  clearly. 

4.  Do  you  think  it  desirable  for  the  common  stock 

of  an  automobile  concern  to  be  widely  distributed?  '^dZ-^fv^ 


FINANCING  DOUBTFUL  ENTERPRISES      117 

Problem  36 
Financing  a  Fruit  Company  in  an  Unusual  Manner 

The Fruit  Company  was  formed  in  1916 

with  none  but  doctors  for  common  stockholders.  The 
scheme  provided  as  follows: 

The  doctors,  who  purchased  common  stock,  were  to 
prescribe  for   their   patients   only   the   kind    of   fruit 

handled  by  the Fruit   Company,    which   it 

was  intended  would  be  of  superior  quality,  raised 
in  the  company's  orchards,  and  kept  in  their  own 
storage  plant.  It  was  assumed  that  because  of  the 
stockholders'  personal  interest  the  sales  of  the  com- 
pany would  be  excellent. 

Common  stock  of  no  par  value  to  the  extent  of 
10,000  shares  was  taken  by  several  hundred  physicians, 
the  amount  paid  being  in  most  cases  very  little.  The 
promoters,  one  broker  and  two  physicians,  issued  to 
themselves  the  major  part  of  the  stock  as  a  reward 
for  their  services.  In  order  to  raise  the  additional  capi- 
tal needed  to  start  operations  on  a  small  scale,  an 
attempt  was  made  to  sell  7  per  cent  sinking  fund,  ten- 
year  gold  notes  to  the  extent  of  $200,000. 

Questions 

1.  Should  this  company  have  been  launched? 

2.  Is  the  common  stock  plan  a  good  one? 

3.  Would  it  have  been  better  to  sell  common  stock 
to  the  patients. 

4.  Why  did  the  promoters  not  sell  preferred  stock? 

5.  Would  you  be  willing  to  invest  in  the  company's 
debentures? 

6.  What  do  you  expect  the  outcome  of  this  propo- 
sition to  be? 

7.  Does  the  date  of  the  formation  of  the  company 
in  any  way  affect  your  answers? 


118         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  37 
Financing  an  Automobile  Finance  Corporation 

The  following  words  of  praise  regarding  the  G.  Com- 
pany appeared,  in  1920,  in  a  New  England  paper: 

The  question  arises  why  a  concern  which  has  l)een 
in  existence  not  over  three  j^ears  has  risen  to  such  a 
pinnacle  of  success  as  the  G.  Company. 

Why  is  it  that  this  company,  starting  with  a  small 
office  on  State  Street  three  years  ago,  has  grown  to  the 
proportions  which  it  now  takes,  in  115  branch  offices 
throughout  the  principal  cities  of  the  East,  em|'>^oying 
upwards  of  two  thousand  men  and  women. 


If  you  will  investigate,  you  will  find  the  answer  to  the 
question,  why  the  company  has  been  so  successful. 

The  G.  idea  is  founded  on  the  principle  that  the  in- 
vestor is  entitled  to  more  than  the  rental  value  of  his 
money.  He  is  entitled  to  the  full  earning  power  of  his 
savings. 

These  savings  represent  the  difference  between  the 
amount  produced  and  the  amount  consumed.  These 
savings  are  represented  in  our  railroads,  in  our  general 
business  of  supplying  the  necessities  and  comforts  of 
life. 

On  the  other  hand,  if  you  look  at  the  increase  of  the 
annual  wealth,  extended  over  a  period  of  fifty  years,  you 
will  find  a  disproportionate  distribution  of  the  annual 
investment  due  to  the  production  that  was  made  possible 
by  the  savings  of  the  people.  If  you  analyze  the 
causes  of  the  situation,  it  is  found  that  the  methods  of 
financing  that  have  been  indulged  in  during  this  period 
of  financing  that  have  been  indulged  in  during  this 
period  of  progress  have  worked  against  the  small 
investor. 

Mr.  G.  saw  in  the  commercial  banking  field,  and 
especially  in  the  field  of  funding  or  loaning  on  auto- 
mDbile  paper,  an  opportunity  that  would  provide  a 
business  that  would  be  profitable  and  at  the  same  time 
as  safe  as  human  ingenuity  can  make  an  investment. 


It  is,  therefore,  this  appeal  to  sound,  common  sense, 
based  upon  work  in  a  field  that  has  proven  profitable, 
that  forms  the  basis  of  the  success. 


FINANCING  DOUBTFUL  ENTERPRISES      119 

Author's  explanations:  When  the  G  company  and  its 
subsidiaries  and  imitators  were  endeavoring  to  sell 
stock  to  small  eavers  in  order  to  beg  n  the  business, 
they  stressed  particularly  the  fact  that  the  banks  had 
heretofore  been  making  all  the  money;  that  they  had 
taken  in  the  savings  of  the  people  at  the  low  rate  of 
4  per  cent  and  had  used  and  reinvested  the  money  in 
such  ways  as  to  make  20  per  cent — 30  per  cent — 50 
per  cent — yes,  and  100  per  cent  or  more  on  their  capital. 
To  lend  further  support  to  this  argument,  it  was 
stated  that  the  Federal  Reserve  Bank  of  New  York 
City  had  during  the  last  year  made  more  than  100 
per  cent  on  its  capital. — This  happened  to  be  true. 

In  this  connection,  the  following  explanations 
regarding  so-called  "Automobile  Finance  Corpora- 
tions," and  the  like,  should  be  borne  in  mind: 

The  reasons  for  the  development  of  the  automobile 
bank  are  inherent  in  the  nature  of  the  distribution  end  of  the 
automobile  business.  The  automobile,  despite  the  current 
assertions  that  it  is  a  necessity,  has  always  been  looked  upon 
by  the  commercial  bankers  as  in  a  different  class  from  staple 
products — as  involving  relatively  large  risks.  Automobile 
dealers,  as  distinguished  from  the  manufacturers,  commonlj- 
have  relatively  small  resources;  they  buy  cars  largely  on 
credit  and  in  turn  sell  them  largel}^  on  credit.  It  has  been 
estimated,  indeed,  that  65  per  cent  of  the  passenger  cars  ard 
90  per  cent  of  the  trucks  are  sold  on  time.  Since  the  auto- 
mobile is  ordinarily  in  the  nature  of  a  luxury,  it  quickly 
becomes  a  drug  o  i  the  market  in  a  period  of  business  depres- 
sion, and  since  secord-hrrd  cars  are  subject  to  a  very  heavy 
depreciation,  commercial  larks  have  not  been  willing  to 
extend  credit  to  automob:le  dealers  in  proportion  to  their 
requirements  in  periods  of  rapid  expansion.  Hence  the 
necessity  of  and  the  opportunity  for  the  automobile  banker. 

The  work  of  the  automob  le  bank  is  s  milar  to  thpt  of 
commercial  paper  houses  and  dscount  companies.  It  is 
something  more  than  a  broker  in  that  it  advances  the  funds 
to  borrowers,  and  it  is  something  les-s  than  a  bank  in  that 
as  a  rule  it  promptly  shifts  to  the  regular  banks  the  burden 
of  carrying  the  loan.  While  similar  to  the  institutions 
already  described,  it  has  nevertheless  evolved  certain  dis- 
tinct financial  methods. 

There  are  two  types  of  automobile  firf^rcing  operatiors  to 
be  described.     First,  certain  large  credit  companies  extend 


120         PROBLEMS  IN  BUSINESS  FINANCE 

what  may  be  called  wholesome  credit  to  automobile  dealers; 
second,  there  are  many  smaller  financing  corporations  which 
specialize  in  the  making  of  retail  loans  secured  by  the 
instalment  notes  of  the  ultimate  purchasers  of  cars. 

1.  The  Wholesale  Plan — The  financing  conducted  under 
the  first  plan  is  designed  to  enable  the  dealer  to  secure  the 
funds  with  which  to  pa}'  the  manufacturer  for  the  cars  with- 
out waiting  for  their  sale  to,  or  at  least  without  waiting  for 
final  payments  from,  customers.  In  a  sense  they  are  there- 
fore financing  the  manufacturers  themselves.  The  loans 
are  made  to  the  automobile  dealer,  who  gives  his  promissory 
note  to  the  automobile  bank,  together  with  chattel  mortgages 
on  the  cars  in  his  possession.  It  should  be  stated,  however, 
that  it  is  only  in  certain  states  that  we  find  the  chattel 
mortgage.  In  some  states  a  trust  receipt  is  used,  and  in 
still  others  a  conditional  sale  agreement  is  employed,  the 
particular  type  being  determined  by  the  varying  laws  of 
different  states. 

While  each  particular  loan  is  in  fact  secured  by  a  chattel 
mortgage  on  a  particular  car,  the  main  reliance  is  nevertheless 
placed  upon  the  dealer's  general  responsibility.  Loans 
made  to  dealers  in  this  way  commonly  run  for  two  or  three 
months.  While  the  loans  are  made  to  the  dealer,  it  should 
be  added,  however,  that  where  cars  are  held  in  storage,  it 
is  customary  for  the  manufacturer  to  guarantee  the  payment 
of  the  loan.  Thus,  the  automobile  bank  often  has  two- 
name  paper.  Such  companies  derive  their  profits  from  a 
gross  "service  charge." 

2.  The  Retail  Plan— A  concrete  illustration  of  the 
practice  followed  by  a  particular  discount  company  will 
indicate  the  difference  between  this  method  of  financing  and 
that  which  we  have  just  described.  Let  us  assume  that  a 
dealer  has  sold  a  car  valued  at  $6,000  and  has  received  SI, 000 
down  and  for  the  remainder  instalment  notes  of  $500 
each,  payable  monthly.  A  chattel  mortgage  is  also  given 
by  the  purchaser.  The  dealer  borrows  $4,000  from  the 
automobile  banker,  putting  up  the  $5,000  in  instalment  notes 
as  collateral  security.  The  dealer  usually  guarantees  the 
payment  of  such  notes.  The  bank  loan  is  typically,  as  in 
this  case,  80  per  cent  of  the  value  of  the  notes  offered  as 
collateral  security.  Since  the  purchaser's  notes  are  paid 
in  monthly  instalments,  the  dealer  is  required  to  pay  his 
loan  to  the  automobile  bank  in  monthly  instalments. 

It  is  the  common  practise  with  these  smaller  companies  to 
discount  the  dealer's  notes,  usually  at  5  per  cent.  And 
since  the  notes  usually  bear  interest  at  7  or  8  per  cent,  the 
compan}'  always  secures  5  per  cent  on  the  face  of  the  note, 
plus  7  per  cent  interest  on  that  portion  of  the  loan  which  it 


FINANCING  DOUBTFUL  ENTERPRISES      121 

finances  out  of  its  own  resources.  Moreover,  since  the 
company  can  usually  borrow  from  the  commercial  banks  on 
its  own  note,  secured  by  the  instalment  notes  received  from 
dealers  as  collateral,  at  a  rate  lower  than  that  which  the 
notes  themselves  bear,  it  will  be  seen  that  some  additional 
profit  is  thus  procured.  It  will  be  apparent,  however,  that 
it  is  the  5  per  cent  discount  that  constitutes  the  main  source 
of  inco  ne. 

The  extent  of  the  gross  profits  that  may  be  obtained, 
therefore,  depends  largely  upon  the  volume  of  loans  that  can 
be  made.  Since  the  dealer  is  required  to  pay  his  loan  to  the 
automobile  bank  in  monthly  instalments,  this  bank  is  in 
fact  in  a  position  at  the  end  of  each  month  to  make  a  new 
loan  of  several  thousand  dollars,  on  the  basis  of  the  instal- 
ment receipts,  borrowing  as  before  80  per  cent  of  the  amount 
from  a  commercial  bank,  on  the  collateral  security  of  the 
new  dealer's  note  and  chattel  mortgage.  These  monthly  pay- 
ments, it  will  be  observed,  will  prove  cumulative  as  addi- 
tional loans  are  extended,  each  of  which  calls  for  monthly 
payments.  In  fact,  by  virtue  of  its  ability  to  borrow  from 
the  commercial  banks,  a  company  is  in  a  position  rapidly 
to  pyramid  the  volume  of  its  business.  It  is  commonly 
believed  that  loans  may  safely  be  made  to  eight  or  ten 
times  of  the  company's  capital. 

The  funds  employed  by  autofnobile  banks  are  procured  in 
a  variety  of  ways.  First,  they  may  borrow  from  the  com- 
mercial bank  or  through  commercial  paper  houses,  on  their 
single-name  promissory  notes,  without  other  security. 
Second,  they  may  borrow  from  commercial  banks  on  their 
promissory  notes,  secured  by  the  instalment  notes  of  the 
purchasers  of  cars.  The  officers  of  the  credit  company  also 
frequently  endorse  the  notes.  Third,  they  may  raise  the 
funds  by  selling  the  company's  unsecured  debenture  bonds 
in  the  investment  market.  This  method  is  apparently  not 
very  commonly  employed.  Finally,  they  may  secure  the 
money  by  selling  in  the  investment  market  collateral  trust 
notes  or  bonds. 

(Moulton,  Journal  of  Political  Economy,  Dec,   1920,  pp.  833-837. 

Questions 

1.  Analyze,  critically,  the  methods  of  securing 
capital  used  by  the  G.  Company. 

2.  Do  you  think  such  financing  was  justifiable  in 
1919? 

3.  From  the  general  social  point  of  view^,  are  such 
companies  necessary?     Desirable? 


122  PROBLEMS  IN  BUSINESS  FINANCE 

4.  How,  if  at  all,  should  you  expect  the  future  finan- 
cial experience  of  concerns  hke  this  to  differ  from  their 
past  history?     Why? 


Problem  38 
Public  Financing  of  a  New  "Private"  Banking  House 

Early  in  1921  the  following  notice  appeared  in  a 
widely  read  eastern  newspaper: 

-17%- 

The  yield  in  Cash  and  Participations  at  par  for 
1920  was  the  above. 

The  C.  N.  Company  Debentures. 
Price  $115  per  Share. 

Apply  to  your  own  bank  or  broker,  or  write  to 
us  direct. 

The Company,  Inc. 

Boston,  Mass. 

In  reply  to  an  inquir}^  regarding  this  advertisement, 
the  ''investment"  company  which  was  responsible  for 
the  notice  replied  as  follows: 

When  you  have  carefully  read  and  digested  the  contents 
of  the  enclosed  folder,  and  perhaps  discus.sed  it  with  your 
banker,  we  think  it  will  be  apparent  to  you  why  the  C.  N. 
Company  debentures  are  recognized  as  being  an  extremely 
safe  investment  with  a  decidedly  attractive  earning  power. 

We  would  call  your  attention  to  the  fact  that  this  securit}' 
embodies  all  the  strength  of  a  well-pelected.  diversified 
group  investment. 


FINANCING  DOUBTFUL  ENTERPRISES       123 

The  following  information  derived  from  the  pros- 
pectus material  enclosed  will  be  instructive: 

The  Business  of  the  C.  N.  Corporation 
The  C.N.  Corporation  aims  to  keep  in  touch  with  manu- 
facturers in  man^^  lines  of  lousiness  in  many  parts  of  the 
country.  It  invites  them  to  submit  their  needs  for  money 
to  be  used  in  their  enterprises.  The  facts  in  each  case  are 
reviewed  by  the  Executive  Conmiittee,  composed  of  three 
officers  of  the  Company.  If  these  facts  are  not  inviting,  the 
matter  is  dropped.  If  the  facts  warrant  further  investigation 
the  Executive  Committee  asks  for  an  auditor's  report  by  an 
outside  auditing  company  and  obtains  from  the  real  estate 
board  in  the  manufacturer's  locality  or  from  some  well- 
known  appraisal  company,  an  official  appraisal  of  the  com- 
pany's physical  property.  The  proposition  then  goes  before 
the  Board  of  Directors,  which  passes  final  judgment  on  the 
subject  before  an  investment  in  an  enterprise  is  made  or  an 
underwriting  undertaken. 

As  the  investment  is  made  or  the  sale  of  a  manufacturing 
company's  stock  is  undertaken  and  developed,  the  C.  N. 
Corporation  binds  itself  more  and  more  closely  into  that 
business  through  representation  upon  the  company's  Board 
of  Directors,  its  Executive  Committee  and  Finance  Com- 
mittee, and  through  the  acknowledged  right  of  audit  and 
inspection  of  such  company's  books  and  property  at  an.y 
time  without  notice,  together  with  an  agreement  for  the 
Fiscal  Agency  for  the  financed  company  for  a  period  of 
years,  usually  not  less  than  five.  In  consequence  of  these 
stipulations  the  C.  N.  is  always  in  a  position  to  know  all  the 
details  in  reference  to  the  business  of  the  companies  it 
finances  Therefore,  the  interest  in  the  corporation  does  not 
ce^se  when  an  underwriting  has  been  completed,  but  this 
contr  )1  and  supervision  follows  thrrnigh  the  administration 
of  the  funds  provided — to  the  very  end — and  it  will  keep  a 
constant  watch  on  the  way  in  which  such  company's  business 
is  developed. 

Such  a  policy,  steadfastly  followed,  goes  as  far  as  humanly 
possible  towards  safeguarding  the  constantly  increasing 
investments  of  the  public  in  C.  N.  Debentures,  and  from  the 
growth  the  Corporation  has  had  it  bids  fair  <o  become  in 
due  time  a  national  institution  of  considerable  importance. 

The  Sources  of  Profit 
The  C.  N.  Corporation   has   several    sources   of   profit, 
chief  among  which  are  the  following: 

First — Through  the  financing  of  sound,  industrial  enter- 
prises— buying  or  underwriting  of  the  preferred  stocks  at  a 


124     .     PROBLEMS  IN  BUSINESS  FINANCE 

certain  figure,  usually  accompanied  by  a  substantial  bonus 
of  the  common  stock,  which  is  held  in  the  treasury  of  the 
C.  N.  C.  N.,  as  it  appears  advisable,  either  holds  in  its 
treasury  for  revenue  or  in  due  time  sells  the  Preferred  Stocks 
at  a  higher  figure.  The  net  profit  is  usually  at  least  5  per 
cent  on  each  transaction  on  the  preferred  stock  alone,  and 
the  annual  profit  from  this  source  depends  only  on  the 
number  of  operations  that  can  be  successfully  handled.  For 
instance,  ten  underwritings  per  annum  of,  say,  $250,000 
each,  at  a  profit  of  no  more  than  5  per  cent,  represent  a 
turnover  of  two  and  a  half  million,  yielding  $125,000  in 
CASH  PROFIT  ALONE,  enough  to  pay  the  guaranteed  dividend 
on  the  total  authorized  Debentures  more  than  two  and  a 
half  times. 

Second — The  profit  in  common  stock  acquired  as  a 
bonus — which  is  seldom  less  than  10  per  cent,  and  fre- 
quently more.  Therefore,  the  C.  N.,  in  addition  to  the 
above  cash  profit,  would  also  have  in  its  treasury  at  least 
$250,000  of  the  Common  Stock  of  the  companies  it  had 
financed.  The  acquisition  of  this  bo7ius  of  stock  permits,  from 
time  to  time,  the  declaration  of  very  attractive  stock  dividends. 

Third — The  sales  organization  of  the  C.  N.,  through 
whjch  it  sells  its  Debentures  and  the  various  preferred 
stocks,  comprises  the  wholesale  investment  security  house 
of  Blank  &  Company,  Inc.,  its  Fiscal  Agents,  in  which  it 
owns  all  but  three  incorporators'  shares.  Blank  &  Company, 
Inc.,  in  turn,  own  or  control  an  increasing  number  of  retail 
investment  security  houses  in  various  other  cities.  These 
houses  function  in  a  capacity  similar  to  branch  offices,  but 
in  this  way  C.  N.  shares  in  their  profits,  and  its  overhead  is 
decidedly  reduced  since  they  are  officered  by  men  of  strong 
local  reputation,  and  transact  business  under  their  own  names 
and  their  own  responsibility. 

Fourth — C.  N.  plans,  through  its  affiliated  houses,  to 
conduct  a  regular  commercial  paper  business,  making  tem- 
porary loans  to  companies  in  which  it  i^  interested,  taking 
their  paper  therefor  and  placing  it  with  banks  in  the  usual 
manner.  This  in  itself  is  a  staple  and  profitable  business 
and  has  its  place  in  the  C.  N.  service  to  business  concerns. 

Fifth — The  Corporation  acts  as  Registrar  and  Trans- 
fer Agent.  The  average  fee  for  acting  in  this  capacity 
is  .$600  per  annum  for  the  registration,  transfer  or  issue  of 
500  certificates,  any  amount  in  excess  thereof  being  paid  for, 
at  the  rate  of  15c  per  certificate.  This  phase  of  the  busi- 
ness entails  practically  no  additional  expense  and  is,  there- 
fore, almost  entirely  clear  profit. 


FINANCING  DOUBTFUL  ENTERPRISES      125 

Sixth — The  salaries  of  the  executives  are  limited,  and 
the  lives  of  the  President  and  Vice-President,  the  two  most 
active  heads  of  the  business,  are  insured  to  the  corporation 
to  the  extent  of  $50,000  each.  The  Treasurer  of  the  Cor- 
poration functions  under  a  bond  of  $100,000  and  great  care 
was  taken  in  drawing  its  Charter  and  By-Laws  by  one  of 

the  most  prominent  law  firms  of  the  country,  Messrs 

& ,  to   protect   the   interests   of   the    Debenture 

holders  in  every  possible  way  through  its  profits  from  all 
sources,  as  well  as  its  investments  and  assets  of  every  nature. 

The  Partnership  Possibilities  of  Debenture  Holders 
It  is  seldom,  as  a  holder  of  Preferred  Stock  in  any  cor- 
poration, you  have  the  chance  to  participate  like  a  partner 
in  the  profits  above  the  fixed  dividend  rate  on  your  stock. 
More  rarely  still  do  you  have  a  chance  for  such  participation 
in  an  investment  banking  institution  such  as  the  C.  N. 
Corporation. 

You  Now  Have  a  Many-Fold  Opportunity 

in  C.  N.  Debentures 

First — The  opportunity  of  securing  through  the   ONE 

investment  the  automatic  diversification  of  your  money  into 

many  lines  of  business,  each  under  the  watchful  eye  of  the 

C.  N.  Corporation,  an  investment  banking  institution. 

Second — Participation  like  a  partner  in  the  profits  and 
opportunities  of  the  business  over  and  above  the  fixed 
dividend  on  your  Debenture — for  instance: 

Suppose  you  put  $100,  $500,  $1,000,  $5,000,  or  the  most 
that  any  one  man  can  invest  in  C.  N.,  namely,  $10,000 — 
into  these  Debentures,  what  do  you  get? 

First,  you  get  the  secimiu  of  dirersification — your  money 
goes,  s&y,  partly  into  a  stove  business,  partly  into  a  bread 
business,  partly  into  a  foundry-,  partly  into  a  chain  store 
system,  partly  into  a  typewriter  factory,  partly  into  an  add- 
ing machine  factory,  partly  into  a  shoe  factory,  and  so  on, 
all  of  which  are  under  the  careful  watch  of  the  C.  N.  to 
produce  as  much  revenue  as  possible. 

Second,  all  of  the  assets  of  the  C.  N.  Corporation  of  every 
kind  whatsoever  are  back  of  your  Debentures  before  anything 
is  applied  at  all  to  the  Common  Stock  of  the  C.  N. 

Third,  every  year  C.  N.  must  pay  7%  cash  return  en  your 
money  before  the  Common  Stock  can  receive  a  penny. 

Fourth,  after  $7.00  has  been  paid  on  each  of  your  Deben- 
tures and  $10.00  a  share  has  been  paid  on  the  Common 
Stock,  you  receive  dollar  for  dollar,  share  for  share  with  the 


126  PROBLEMS  IN  BUSINESS  FINANCE 

Common  Stock  iti  additional  cash  dividends  declared  by  the 
Corporation. 

Fifth,  from  time  to  time  ijoii  receive  special  partici])ations 
in  the  way  of  distributions  of  stocks  from  the  treasury 
of  the  C.  N.,  accumulated  throuf^h  its  financing  operations. 
Such  special  participations  have  equaled  10%  in  par  value 
over  and  above  the  cash  dividends.  It  is  not  expected  that 
they  will  be  less,  but  rather,  in  line  with  treating  Deben- 
ture holders  as  much  like  partners  as  possible,  such  partici- 
pations are  apt  to  be  more  generous  as  time  goes  on. 

Sixth,  when  the  preferred  stocks  of  companies  financed  are 
put  on  tlie  market,  you  are  entitled  to  a  discount  from  the  price 
in  advance  of  public  offering. 

Seventh,  in  order  that  you  as  a  Debenture  holder  may 
always  be  informed  of  the  status  of  your  Company  a  business 
statement  is  furnished  you  by  the  Treas^irer  every  60  days. 
This  statement  shows  you  how  and  where  the  business 
stands.  Most  concerns  issue  statements  annually,  some 
semi-annually,  but  so  far  as  we  know,  this  is  the  only  in- 
stitution, that  issues  a  statement  every  60  days.  Through 
these  statements,  you  are  kept  constantly  informed  of  the 
progress  of  the  business  in  which  j^ou  are  a  Debenture 
holder  and  partner. 

Furthermore,  as  a  Debenture  holder,  you  are  entitled 
to  the  some  voting  privileges  as  held  by  the  Ccmmon  Stock 
of  the  Corporation,  which  is  one  vote  at  all  meetings  of  the 
stockholders  for  each  Debenture  held.  This  assures  j^ou  a 
voice  in  the  administration  of  C.  N.  affairs — a  voice  that  in 
the  majority  of  companies  is  denied  the  holders  of  anything 
other  than  the  Common  Stock. 

The  Human  Element 

The  average  corporation  is  apt  to  be  a  cold  proposition. 
With  the  C.  N.  every  effort  is  made  towards  the  other  ex- 
treme. The  policy  of  j-our  ofHcers  and  directors  to  humanize 
the  C.  N.  to  the  greatest  possible  extent  has  met  the  approval 
of  Debenture  holders  everywhere.  Your  officers  alternate 
in  visiting  all  localities  where  there  is  a  sufficient  number 
of  Debenture  holders  to  gather  in  a  meeting  to  hear  personally 
and  informally  about  the  progress  and  plans  of  the  C.  N. 
business.  These  meetings  also  offer  the  opportunity  of 
acquaintance  and  fellowship  with  each  other,  and  as 
Debenture  holders  in  every  community  are  substantial 
men,  this  is  an  opportunity  highly  appreciated. 

In  localities  where  there  are  fifty  or  more  Debenture 
holders  this  meeting  takes  the  form  of  a  quarterly  or  semi- 
annual dinner,  at  which  not  only  the  officers,  but  some  or  all 
of  the  Board  of  Directors  endeavor  to  be  present. 


FINANCING  DOUBTFUL  ENTERPRISES      127 

This  program  of  humanizing  the  Corporation  has  been 
adopted  advisedly  in  the  behef  that  the  soundest  foundation 
of  any  institution  or  organization  Hes  in  the  complete  under- 
standing and  confidence  of  all  concerned,  and  it  is  being 
systematically  made  a  most  practical  source  of  strength  to 
the  Corporation.  Therefore,  in  buying  C.  N.  Debentures 
you  not  only  make  an  investment  as  safe  and  profitable  as 
humanly  possible,  you  not  only  have  as  much  of  the  oppor- 
tunities of  a  partner  in  an  investment  banking  business  as 
possible,  but  you  become  one  of  a  large  and  constantly 
growing  circle  of  Debenture  holders  which  is  almost  in  the 
nature  of  a  club. 

From  the  prospectus  it  appears  that  the  officers  of 
the  C.  N.  Corporation  are  identical  with  the  officers  of 
the  Blank  Investment  Company. 

Questions 

1.  Do  you  believe  that  the  financial  plan  of  the  C.  N. 
Corporation  is  a  sound  one?     W  hy? 

2.  Do  3^ou  think  it  wise  to  finance  such  a  corporation 
in  1920-21? 

3.  If  you  were  a  business  man  should  you  appeal  to 
this  company  for  assistance  in  financing? 

4.  Would  you  advise  your  friends  to  invest  in  the 
Debentures  of  this,  corporation? 

5.  Is  it  desirable  that  an  investment  banking  business 
be  incorporated?     Why? 


128         PROBLEMS  IN  BUSI^i^S  FINANCE 

PROBLEiv/39    \ 
Financing  a  Mortgage  toMPANY 

Early  in  1921  the  following  literature  was  sent  out 
by  a  newly  organized  mortgage  company  of  Akron, 
Ohio,  whose  active  manager  is  a  university  graduate 
of  about  ten  years  standing: 

PUTTING    YOUR   DOLLAR    TO    WORK! 
VALUABLE   INFORMATION    FOR   THE    SMALL   INVESTOR 

The    Company   is   formed   b}^   the    banding 

together  of  the  resources  of  thousands  of  men  and  women 
of  moderate  means  for  the  purpose  of  investing  their  money 
in  the  safest  security  known — namely,  Mortgages  on  im- 
proved, income-producing  property. 

Individually  their  money  would  have  rental  value  only. 

Collectively  it  has  the  earning  power  of  capital  in  large 
amounts  employed  in  a  purely  financial  institution. 

Mortgages  are  the  one  class  of  security  that  has  with- 
stood the  onslaught  of  changing  conditions  in  America  for  a 
hundred  and  fifty  years. 

Their  fundamental  safety  is  acknowledged  by  savings 
banks,  insurance  companies,  trusteeships  and  guardianships, 
all  of  which  are  required  bj^  law  to  invest  in  properly  selected 
mortgages. 

The  Company  combines  the  safety  of  a  mort- 
gage investment  with  the  earning  power  of  large  capital 
frequently  turned  in  the  great  and  well-lubricated  machinery 
of  the  modern  financial  workl. 

Stockholders  in  such  financial  institutions  have  received 
with  absolute  safety  and  certainty  returns  of  hundreds  and 
even  thousands  of  per  cent  on  their  original  investments 
over  a  period  of  years. 

As  a  part  owner  in  this  company,  which  has  already 
demonstrated  its  earning  power  in  the  prompt  payment  of 
its  quarterly  dividends,  you  are  offered  a  share  in  the  large 
earnings  it  has  every  right  to  expect  as  its  assets  and  earning 
power  increase  from  year  to  ,vear. 

What  the Company  Is 

The   Company  is  'an  Ohio  corporation.     It  is 

a  mortgage  company  restricted  by  the  terms  of  its  charter 
to  deal  in  one  class  of  securit}^  onlj' — mortgages  on  improved 
income-producing  real  estate.  It  can  also  own  property  in 
its  own  name. 

It  can  buy  mortgages,  make  first-mortgage  construction 
loans,  and  by  placing  these  mortgages  in  trust  it  can  issue 


FINANCING  DOUBTFUL  ENTERPRISES      129 

bonds  against  them,  thus  getting  the  use  of  the  original 
amount  invested  a  second  time  and  making  ad(Utional 
profits  from  the  reinvestment  of  its  funds. 

How  Profits  are  Made  by  Purchasing 
Mortgages 

We  buy  first-class  real  estate  mortgages  on  improved, 
income-producing  property  only.  Our  appraisals  are  most 
conservative.  Bear  in  mind  the  fact  that  the  lower  the 
appraisal,  the  less  money  we  have  to  pay  for  a  mortgage,  and 
you  will  understand  why  our  appraisals  may  at  all  times  be 
said  to  be  "ultra  conservative." 

The  profit  on  the  average  mortgage  purchase  may  be 
computed  in  the  following  manner : 

Face  value  of  mortgage $1,500.00 

Purchase  price  (20%  discount) 1,200.00 

Profit $300.00 

This  $300  is  25%  profit  on  the  $1,200  invested,  made  the 
moment  the  transaction  is  completed,  with  no  waiting,  no 
further  expense  and  no  guesswork. 

All  mortgages  pay  7%  on  their  face  value  in  this  locality, 
so  we  receive  7%  interest  on  the  $300  profit,  as  well  as  the 
7%  on  the  $1,200  we  invested,  or  a  total  of  8 3^%  on  the 
actual  amount  of  money  invested. 

The  first  year's  profit  on  the  above  transaction  would 
therefore  be  SH%  plus  25%,  or  33^%. 

How  Profits  are  Made  in  First-Mortgage 
Construction  Loans 

■  Suppose  a  building  operator  desires  to  erect  an  apartment 
house  or  other  income-producing  building  which  will  cost 
a  total  of  $100,000  and  wishes  to  secure  a  first-mortgage 
construction  loan. 

He  must  have  $40,000  in  casli  himself  before  he  can 
secure  a  loan  from  us. 

After  thorough  investigation  of  the  man  and  his  proposi- 
tion we  will  loan  him  up  to  $60,000 — or  60%  of  the  value  of 
the  property. 

The  method  of  making  the  loan  is  as  follows:  His 
$40,000  is  deposited  with  us  first.  When  the  first  floor  of 
the  building  is  completed  we  pay  the  contractor  part  of  his 
money  upon  advice  of  our  own  supervising  engineers;  when 
the  second  is  completed  another  part;  and  so  on  until  the 
building  is  finally  completed. 


130  PROBLEMS  IN  BUSINESS  FINANCE 

Note  particularly  that  we  pay  out  the  $40,000  that  has 
been  deposited  with  us  first;  and,  secondly,  we  pay  out  the 
$60,000  loan  over  a  period  of  six  months  to  one  year. 

Suppose  the  loan  is  for  three  years.  We  charge  a  com- 
mission of  2%  a  year,  amounting  to  a  total  of  6%  on  $60,000, 
or  $3,600. 

In  addition  to  this  we  have  had  the  use  of  $40,000  for  a 
period  of  from  four  to  six  months. 

The  borrower  pays  us  7%  interest  on  the  first-mortgage 
construction  loan  from  the  date  the  papers  are  signed,  which 
is  always  three  to  six  months  in  advance  of  his  receipt  of  the 
actual  cash. 

When  the  building  is  completed  we  have  a  first  mortgage 
worth  $60,000  on  income-producing  property  worth  $100,000 
in  addition  to  the  value  of  the  building  lot.  This  first  mort- 
gage is  a  marketa))le  security,  which  we  can  sell  by  offering 
it  to  a  bank,  insurance  company  or  a  trust  company. 

Or  we  can  dispose  of  it  by  putting  it  in  trust  and  issuing 
first-mortgage  bonds  against  it  in  denominations  of  $500 
and  $1,000.    These  bonds  are  sold  to  individuals  and  banks. 

In  this  way  we  get  our  money  back  before  the  maturit}^ 
of  the  mortgage  and  put  it  to  work  again. 

Money  is  made  on  the  quick  turnover  of  capital.  Suppose 
we  make  this  kind  of  a  turnover  every  two  months.  This 
means  that  we  make  a  commission  of  6%  on  each  loan  six 
times  per  year — or  36%  in  commissions  in  one  year  on  first- 
mortgage  construction  loans,  with  accrued  interest  in 
addition. 

Our    Three    Sources    of    Getting    Money    to    Invest 
Cash  comes  in  to  this  Company  from  three  sources — 

1.  Sale  of  stock. 

2.  Payments  of  interest  and  principal  on  mortgages  held 
by  us. 

3.  Borrowing  capacity,  including  short-term  bank  loans 
and  bond  issues. 

Cash  received  from  the  sale  of  stock  is  the  first  money 
received  by  this  company,  and  is  immediately  used  for  the 
purpose  of  buying  mortgages  at  a  discount,  and  of  making 
first-mortgage  construction  loans. 

Many  of  our  mortgages  are  monthly  payment  mortgages 
on  which  both  the  interest  and  part  of  the  principal  are  paid 
back  to  us  each  month,  thus  constantly  reducing  the  amount 
of  money  invested  in  the  mortgage,  and  making  our  equity 
and  margin  of  safety  constantly  larger  and  larger. 

The Company  has  a  borrowing  capacity  from 

banks  which  are  permitted  to  make  short-term  loans.    This 


FINANCING  EOUBTFUL  ENTERPRISES      131 

money  is  also  immediately  used  to  purchase  mortgages, 
proper  provisions  being  made  to  pay  back  the  loans  as  soon 
as  they  fall  due,  from  income  on  mortgages. 

Bond  Issues 

The  largest  source  of  cash,  however,  that  this  company 
has,  comes  from  its  ability  to  issue  bonds  against  mort- 
gages held  in  trust  by  a  trust  company.  This  process  is 
very  simple,  and  operates  as  follows: 

We  take  part  of  the  mortgages  we  have  and  place  them  in 
the  vaults  of  a  bank  or  trust  company,  under  a  trust  agree- 
ment which  provides  that  the  bank  or  trust  company  must 
see  that  sufficient  mortgages  are  maintained  in  trust  to  back 
up  the  bonds  issued  against  them. 

The  trust  agreement  also  provides  that  sufficient  funds 
must  be  placed  in  a  sinking  fund  at  the  bank  to  pay  the  bond 
coupons  and  principal  when  they  fall  due. 

This  sinking  fund  is  maintained  by  the  payments  on  the 
mortgages  themselves,  so  that  the  whole  plan  works  auto- 
matically, and  the  payments  on  the  mortgages  automatically 
liquidate  the  bonds  when  they  come  due. 

In  addition  to  this  security,  the Company  is 

liable,  as  a  company,  for  the  bond  issue;  and  if  default  should 
ever  occur  in  the  payments  on  any  one  mortgage,  this  com- 
pany must  make  good  the  default  by  placing  another 
mortgage  in  trust,  and  by  making  up  the  amount  due  out 
of  its  other  resources. 

The  extreme  care,  however,  that  this  company  takes  in 
purchasing  only  first-class  mortgages  makes  it  possible  for 
us  to  say  that  we  have  never  had  a  mortgage  go  bad  on  us — 
nor  have  we  ever  had  to  foreclose  a  mortgage  in  order  to 
enforce  payment. 

Many  mortgage  companies  throughout  the  United  States 
have  bond  issues  outstanding  many  times  the  amount  of 
their  original  capital  stock.  The  more  bonds  this  company 
can  sell,  the  more  money  it  makes — and  the  greater  will  be 
the  cash  returns  to  the  stockholders. 

Free  From  Taxes 

Shares  in  the Company  are  tax-free  in  Ohio  and 

free  from  normal  federal  income  tax  under  the  present 
laws.  This  means  that  such  taxes  as  are  levied  by  the  State 
upon  this  business,  comparatively  small  in  amount,  are  paid 
by  the  company. 

The  7%  dividends  on  the  preferred  and  the  dividends  on 
the  common  are  given  to  j^ou  in  full  amount,  with  nothing 
deductible  for  the  State. 


132  PROBLEMS  IN  BUSINESS  FINANCE 

Dividends  Payable  Quarterly 

Dividends  botli  on  the  preferred  and  common  shares  are 
payable  in  January,  April,  July,  and  October  of  each  year. 
These  dividend  checks  are  mailed  promptly  on  the  last 
day  of  each  month  |)recedinp;  the  dividend-paying  month, 
and  should  l)e  in  the  liands  of  stockholders  on  the  first  of  the 
month.    The  common  is  now  on  a  20%  dividend  basis. 

Preferred  Shares  Redeemable 

At  the  option  of  the  Board  of  Directors  the  preferred  may 
be  redeemed  in  part  or  in  whole  at  any  time  after  Januarj'-  1, 
1921,  at  $110  per  share  and  accrued  dividends. 

The  company  makes  no  promise  as  to  when  this  redemp- 
tion will  occur,  but  it  is  for  the  interest  of  the  stockholders 
to  have  this  preferred  redeemed,  and  every  effort  will  be  put 
forth  by  the  officers  to  start  redemption  as  soon  as  this  policy 
will  benefit  the  stockholders. 

Terms  of  Purchase 

Shares  in  the Company  may  be  purchased  for 

cash,  or  on  varying:  terms  to  suit  the  convenience  of  the 
purchaser.  When  shares  are  purchased  for  cash,  the  pre- 
ferred begins  to  earn  7%  dividends  from  date  of  purchase, 
plus  regular  dividends  on  common. 

6%  Interest  on  Deposits  Compounded  Quarterly 

When  shares  are  purchased  on  the  Easy  Payment  Plan, 
all  money  deposited  with  the  Company  draws  6%  interest, 
compounded  quarterlv,  until  such  time  as  stock  is  paid  in 
full. 

The Company  Thrift  Plan 

SW  Per  Month  Buys— 

6  shares  of  preferred  at  $100,  and 

3  shares  of  common  at  $20;  total  $660 

$15  Per  Month  Buys 

8  shares  of  preferred  at  $100,  and 

4  shares  of  common  at  $20;  total  $880 

820  Per  Month  Buys 

10  shares  of  preferred  at  $100,  and 

5  shares  of  common  at  $20;  total  $1,100 

$25  Per  Month  Buys— 

12  shares  of  preferred  at  $100,  and  -» 

6  shares  of  common  at  $20;  total  $1,320 


FINANCING  DOUBTFUL  ENTERPRISES      133 

Per  Month  Buys — 
16  shares  of  preferred  at  $100,  and 

8  shares  of  common  at  $20;  total  $1,760 

S35  Per  Month  Buys— 

18  shares  of  preferred  at  $100,  and 

9  shares  of  common  at  $20;  total  $1,980 

i40  Per  Month  Buys— 

20  shares  of  preferred  at  $100,  and 

10  shares  of  common  at  $20;  total  $2,200 

How  Thrift  Plan  Pays  18f  %  Per  Year 

When    Interest    is    Compounded    Quarterly    on    six-share 

purchase  at  $10.00  per  month. 

Interest 

No.  Years                  Paid  on  Compounded 

Principal  Quarterly 

1  year           •       $120.00  $     3.96 

2  years                   240.00  15.52 

3  years                  360.00  35.14 

4  years                  480.00  63.34 

5  years                  600 . 00  100 . 64 
53^  years                  660.00  122.87 

Average  yearly  payment  on  principal $120.00 

Total  amount  of  compound  interest  53^  years 122.87 

Average  yearly  interest 22 .  34 

Average  yearly  rate  of  interest 18f% 

What  You  Get 

While  you  are  paying  for  your  securities  in  full,  they  are 
deposited  with  us  and  are  increasing  in  value  constantly. 

When  shares  are  bought  on  the  small-payment  plan,  the 
common  alone — by  the  time  they  are  paid  for  in  full — should 
have  a  ready  market  value  of  upwards  of  $200  per  share. 
This  prediction  is  borne  out  by  the  history  of  other  mortgage 
companies. 

(Here  follows  a  detailed  statement  of  the  earnings  of  several  New 
York  mortgage  companies — Author's  Note). 

Finally  the  following  suggestions  are  made: 

"The  man  who  shut  his  eyes  and  purchased  a  few  shares 
in  new  financial  institutions  has  made  more  money  and 
suffered  less  loss  than  in  any  other  investment  field  known 
to  man.    He  has  enjoyed  the  maximum  of  profits." 

Hon.  Leslie  M.  Shaw, 
Sec.  of  the  Treas.  U.  S.  for  5  years 


134  PROBLEMS  IN  BUSINESS  FINANCE 

A  Message  to  Women 

How  many  women  of  your  acquaintance  have  that 
enviable  possession — an  independent  income? 

Among  the  1,500  partners  wlio  own  the Com- 
pany at  least  300  of  them  are  women.  The  president  of  this 
company  has  often  made  the  statement  that  women  are 
good  investors  of  money.  They  usually  refuse  to  take 
chances,  and  insist  on  fundamental  safety  rather  than 
promises  of  large  and  quick  returns. 

A  small  investment  in  the  shares  of  this  company  will  grow 
over  a  period  of  years  into  a  considerable  amount  if  con- 
stantly reinvested.  The  fear  of  poverty  need  never  haunt 
the  woman  who  has  her  money  invested  in  the  kind  of  mort- 
gages this  company  handles. 

A  small  monthly  saving  is  easy  for  you  to  put  aside  now. 

Put  it  in  the  securities  of  the Company,  and  you 

will  always  have  the  knowledge  that  no  matter  what  happens, 
you  will  have  a  regular  income  not  dependent  on  your  own 
efforts  to  produce. 

The  manager  of  this  real  estate  company,  earlier  re- 
ferred to,  was  recently  making  a  rather  energetic 
attempt  to  enlist  the  services  of  advanced  college  stu- 
dents in  connection  with  the  company's  security-selling 
campaign.  Some  university  employment  offices  are 
said  to  have  recommended  the  position  as  being  par- 
ticularly attractive  at  this  time. 

Questions 

1.  Would  you  be  willing  to  sell  the  stock  or  the  6 
per  cent  first  mortgage  bonds  of  this  company? 

2.  What  should  you  expect  the  financial  experience 
of  this  company  to  be  during  the  years  1921  and  1922? 

3.  Analyze  the  proposition 

(a)  From  the  point  of  view  of  its  financial 
soundness. 

{b)  From  the  point  of  view  of  the  economic 
service  rendered. 


FINANCING  DOUBTFUL  ENTERPRISES      135 

Problem  40 
Financing  a  Fisheries  Company  During  the  War  Period 

At  the  end  of  1917,  a  fisheries  company  was  organized 
in  New  England.  As  Liberty  Loans  had  been  taking 
up  the  slack  in  the  investment  market,  an  attempt  was 
made  to  interest  small  subscribers  in  the  stock  of  the 
company.  In  selling  the  stock,  the  management  stressed 
that  fact  that,  due  to  the  war  conditions,  the  price  of 
pork  and  beef  had  risen  to  such  an  extent  that  people 
were  being  advised  to  eat  fish  instead  of  their  cus- 
tomary flesh  food.  They  further  pointed  to  the  con- 
servation campaign  being  carried  on  by  the  Federal 
Food  Administration,  and  to  the  fact  that  people  were 
being  advised,  for  patriotic  reasons,  to  eat  fish  instead 
of  the  food  which  was  needed  by  our  own  troops  and 
our  allies  abroad. 

Further  use  was  made,  in  selling  the  stock  of  the 
concern,  of  a  letter  which  had  been  written  by  the 
United  States  Commissioner  of  Fisheries,  in  which  he 
wrote  as  follows  to  the  management: 

"I  have  had  occasion  to  examine  the  plans  and  note 
the  prospects  of  this  company  and  have  become  satis- 
fied that  it  is  in  a  position  to  do  a  very  large  and 
remunerative  business.  No  more  favorable  time  could 
have  been  chosen  for  launching  a  new  fishery  company, 
for  the  country  is  fish  hungry,  and  the  demand  for 
fish  food  far  exceeds  the  supply  and  will  continue  to 
do  so.  It  is  my  opinion  that  the  stock  of  this  company 
is  a  safe  investment,  and  I  do  not  see  how  it  can  fail 
to  yielci  handsome  returns." 

The  following  prospectus  was  used  in  selling  the  first 
stock  issues  to  small  investors: 

S3,000,000 
7%  Cumulative  Preferred  Shares. 

Full  Paid,  Non-Assessable  Tax  Exempt  in  Maine 

E.  Fisheries  Company 

Incorporated  Under  the  Laws  of  Maine. 

Registrar  Transfer  Agent 

Equitable  Trust  Company  Empire  Trust  Company 

New  York  City  New  York  City 


136  PROBLEMS  IN  BUSINESS  FINANCE 

Capitalization 

Bonds None 

7%  Cumulative  Preferred $5,000,000  Par  SlOO 

Common  Shares $5,000,000  Par  $10 

The  E.  Fisheries  Company  is  a  profitably  producing; 
company,  operating;  out  of  Boston,  Portland,  Gloucester  and 
New  York.  The  proceeds  of  this  issue,  already  largely 
subscribed,  are  for  the  enlargement  of  this  company's 
fishing  equipment,  by  the  addition  of  further  highly  produc- 
tive steam  trawling  vessels.  The  Company  has  4  large  food- 
producing  vessels  in  regular  operation  and  is  adding  several 
additional  trawlers.  The  Company's  latest  steam  trawler, 
the  S.  S.  "Pelican,"  nearing  completion  in  the  shipyards  at 
Portland,  Maine,  is  of  the  same  large  size  and  efficient  type 
as  the  S.  S.  "Seabird"  lately  added  to  the  Company's  produc- 
ing fleet.  The  plans  of  the  Company  are  in  accord  with 
those  laid  down  by  the  United  States  Government. 

Through  alliance  with  the  largest  fisheries  interests  in  this 
countrj",  the  company  is  highly  favored  with  an  efficient, 
practical  management  and  strong  advisory  talent  long 
identified  with  the  fishing  industry. 

Salient  Points  of  Merit 

First — The  Preferred  Shares  are  preferred  as  to  assets 
and  dividends.  Dividends  are  payable  quarterly  on  the 
first  day  of  January,  April,  July  and  October.  The  preferred 
shares  are  redeemable,  in  whole  or  in  part,  at  the  option  of 
the  directors  at  $115  per  share  and  accrued  dividends. 

Second — The  ships  operating  and  under  construction  for 
the  company  are  tangible  assets  with  ready  market  value. 

Third — The  company's  ships  and  equipment  are  all 
insured  to  the  full  amount  of  their  cost. 

Fourth — No  bonded  indebtedness  can  be  placed  on  any 
of  the  company's  property  while  this  issue  is  outstanding, 
except  by  the  written  consent  of  two-thirds  of  the  out- 
standing preferred  stock. 

Fifth — Actual  records  of  the  steam  trawlers  now  operat- 
ing on  the  East  Coast  substantially  indicate  that  all  the  ships 
of  this  company,  when  in  full  operation,  should  earn  more 
than  eleven  times  the  preferred  dividend. 

Sixth — The  E.  Fisheries  Companj^  has  no  indebtedness. 
It  owns  its  entire  operating  equipment  free  and  clear.  All 
ship-construction  contracts  are  paid  in  full  to  date. 

Seventh — The  Company  pays  regular  dividends  of  7%. 


FINANCING  DOUBTFUL  ENTERPRISES       137 

Earnings 
Estimated    Net   Operating   Earnings   for  Twelve  Months: 

15  Trawlers,  when  in  full  operation,  per  annum,  $2,700,000 
Dividend  requirements  on  7%  Preferred,  approxi- 
mately        210.000 

Balance  available  for  Surplus $2,490,000 

This  estimate  is  based  upon  the  actual  earnings  of  steam 
trawlers  now  in  operation. 

Legality 

All  legal  matters  pertaining  to  the  incorporation  of  this 
company  and  to  this  issue  have  been  approved  by  Wilber, 
Norman  &  Kahn,  New  York  City. 

We  recommend  the  purchase  of  these  shares  as  a  sound 
INVESTMENT.     Pfice  Oil  application. 

I.  M.  TAYLOR  &  CO. 
Incorporated 

7  Wall  Street,  New  York 

Business 

American  Fisheries  is  our  last  great  undeveloped  natural 
resource.  Ranking  next  to  the  beef  industry,  it  is  but 
beginning  to  feel  the  hand  of  modern  enterprise.  The 
primitive  methods  that  have  for  centuries  governed  this 
vast  and  important  food  industry  are  giving  way  to  the 
world's  imperative  food  needs. 

The  steam  trawler  works  fast  between  an  unlijyiited  supply 
and  an  unlimited  demand.  What  the  harvester  is  to  agricul- 
ture, the  steam  trawler  is  to  the  fisheries  industry.  With  its 
giant  nets  it  drags  the  near-by  bottom  of  the  sea  where  the 
"ground"  fish  are  permanentl}'  feeding.  It  saves  an  enor- 
mous amount  of  time  as  it  is  not  sul)servient  to  the  elements. 
It  can  harvest  in  a  few  days  250,000  to  350,000  pounds  of 
fish  and,  with  its  high  speed,  returns  quickly  to  market 
where  a  heavy  demand  awaits  it. 

The  Great  Fishing  Banks,  off  the  North  Atlantic  Coast, 
are  the  richest  in  the  world.  The  "ground"  or  "bottom" 
fish,  permanently  obtained  there,  are  standard  for  food 
purposes  and  command  high  prices.  Our  Great  Banks  alone 
could   supply  the  food-fish  demands  of  the  entire  world. 

This  business  is  a  safe  and  dependable  one.  The  steam 
trawler  harvests  this  food  product  rapidly  and  regularly, 
in  large  quantities  and  in  all  seasons  and  under  all  weather 
conditions.  The  shiploads  are  quickly  landed  and  cash  is 
promptly  received  on  delivery. 


138         PROBLEMS  IN  BUSINESS  FINANCE 

The  great  superiority  of  the  big  steam  trawler  over  the 
common  type  of  fishing  schooner  is  thoroughly  demonstrated 
over  a  long  period.  One  steam  trawler  has  a  greater  capacity 
for  production  than  a  fleet  of  fishing  schooners. 

At  the  outbreak  of  the  war  some  7,500  of  these  steam 
trawlers  were  regularly  operating  in  Europe.  On  this  side 
of  the  Atlantic  there  are  less  than  20  operating  at  the  present 
moment.  Many  more  are  urgently  needed.  The  present 
and  immediate  plan  of  the  E.  Fisheries  Company  is  to  add 
an  additional  fleet  of  these  profitable  steam  trawlers.  It  is 
for  the  enlargement  of  the  company's  successful!}^  operating 
fleet  that  the  company  is  making  the  present  offering  of  its 
preferred  stock. 

Fish  by-products  constitute  an  important  industry  of 
unlimited  opportunity.  All  fish  by-products  are  produced  by 
very  simple  and  well-established  processes.  They  find  a 
ready  market  and  yield  enormous  profits.  A  big  demand, 
far  in  excess  of  the  suppl}^  always  exists  for  fish-oil,  fish-glue, 
fish  fertilizer,  fish-leather  and  for  chicken  and  cattle  food 
elaborated  from  fish. 

Directors 

F.  0.  Bezner,  Capitalist,  New  York  City. 

I.  M.  Tavlor,  of  I.  M.  Taylor  &  Co.,  Bankers,  New  York 
City. 

L.  F.  Nagle,  President  of  Nagle  Steel  Company,  Potts- 
town,  Pa. 

W.  F.  Birch,  President,  Dover  Boiler  Works  Co.,  Dover, 
N.  J. 

C.  E.  Knoeppel,  of  C.  E.  Knoeppel  &  Co.,  Counsellor? 
on  management,  New  York  City. 

Irving  Cox,  of  Cox  &  Stevens,  Naval  Architects,  New 
York  City. 

W.  G.  Timothy,  Vice-President,  James,  McCreery  &  Co., 
New  York  City. 

Richard  Cole,  of  P.  K.  Wilson  &  Son,  New  York  City. 

Walter  P.  Wells,  President,  Williams  &  Wells,  New  York 
City. 

Mark  W.  Norman,  Vice-President,  Home  Bank  &  Trust 
Co.,  Darien,  Conn. 

W.  E.  Aughinbaugh,  Chair  of  Foreign  Trade,  New  York 
University;  Foreign  and  Export  Editor,  N.  Y.  Commercial, 
New  York  City. 

I.  M.  TAYLOR  &  CO. 


FINANCING  DOUBTFUL  ENTERPRISES       139 

Questions 

1.  As  a  business  proposition,  do  you  think  it  was 
desirable  to  float  a  new  fisheries  company  in  1918? 

2.  Do  you   agree  with  the  claims  made    and   the 
methods  used  by  the  E.  Fisheries  Company? 

3.  What  is  your  opinion  of  the  directorate  of  this 
Company? 

4.  What  is  your  opinion  of  the  letter  written  by  the 
United  States  Commissioner  of  Fisheries? 

5.  Should  you  expect  that  the  stock  of  this  company 
could  be  sold  in  1918? 

6.  What  should  you  expect  the  financial  future  of 
this  company  to  be? 

7.  Do  you  believe  that  any  fisheries  company  should 
be  publicly  financed?     Why? 


Problem  41 
Financing  a  New  Theatre  in  1921 

Late  in  1920  the  following  financial  advertisement 
appeared  in  the  Harvard  Crimson. 

THE  STATE  THEATRE 

Massachusetts  Avenue,  Boston 

Management — The  management  is  substantially  the 
same  as  "Loew's,  Incorporated,"  capital  $35,000,000,  of 
New  York;  Marcus  Loew,  President;  M.  Douglas  Flattery, 
of  Boston,  Managing  Director.  The  State  Theatre  is  ex- 
pected to  open  January  1st;  and  is  to  have  25  per  cent 
greater  capacity  than  the  Orpheum  Theatre  of  Boston,  also 
under  the  same  management  and  which  earned  net  last  year 
$346,213. 

Earnings — If  the  State  Theatre  profits  equal  the  Orpheum 
record  of  last  3'ear  there  will  be  34.6  per  cent  earned  for  the 


140  PROBLEMS  IN  BUSINESS  FINANCE 

$1,000,000  State  Theatre  Company  common  stock.  Revenue 
from  leases  on  the  property  other  than  the  theatre  will  be 
sufficient  to  pay  preferred  stock  dividends. 

This  amounts  to  capitalizing  for  only  $1,000,000  a  4,000- 
capacity  Loew  Theatre  in  an  excellent  location.  The 
Orpheum  Theatre  having  less  capacity  is  capitalized  at 
$2,712,500  and  yet  is  paying  14  per  cent  on  its  common 
stock  besides  7  per  cent  on  its  preferred  stock. 

Stock  First  Lien — There  will  be  no  mortgage.  We 
estimate  the  total  value  of  the  State  Theatre  property  will 
be  $3,152,000,  being  capitahzed  at  onlv  $1,250,000  preferred 
and  $1,000,000  common  stock. 

We  suggest  a  certificate  as  an  ideal  Christmas  Gift;  one 
which   will   benefit   the  recipient  and  remember  the  giver 
quarterly  for  years  to  come. 
Subscribe  for  the  Common  Stock  now  at  par,  $10  a  share, 
or  send  for  circular. 

On  Februarj^  21,  1921,  there  appeared  a  notice  from 
a  local  investment  house  stating  that  to  subscribe  to 
common  stock  of  the  State  Theatre  Company  was 
"Like  buying  $140  worth  of  real  estate  for  $100  and 
having  20  per  cent  on  your  investment. "  It  was  further 
stated  that  "The  last  of  the  common  stock  of  the  State 
Theatre  Company  is  now  offered  at  par,  $10  a  share. " 

On  June  6,  1921,  there  appeared  in  one  of  the  leading 
Boston  newspapers  a  financial  notice  to  the  effect  that 
the  State  Theatre  Company  was  offering  an  issue  of 
$1,200,000  first  mortgage,  7  per  cent,  convertible  gold 
bonds  due  June  1,  1946,  Federal  income  tax  to  the  ex- 
tent of  3  per  cent  to  be  refunded.  The  following  in- 
formation is  quoted  from  this  notice: 

The  Convertible  Clause  and  its  Value 
On  June  1st,  1926,  and  December  1st,  1926,  and  each  6 
months  thereafter,  l}/2%  of  the  outstanding  bonds  will  be 
redeemed  in  the  usual  way  at  103%  (see  deed  of  trust  for 
particulars).  But  up  to  June  1st,  1926,  no  bonds  will  be 
redeemed,  and  at  any  time  during  this  period  the  owner 
of  a  bond  can  exchange  it  for  an  equal  amount  of  common 
stock  at  par.  The  common  stock  has  been  sold  at  a  premium, 
and  if  earnings 'equal  or  exceed  estimates,  the  premium  on 
the  common  stock  may  increase  to  50%  or  more — which 
would  reflect  on  the  bonds  and  make  them  worth  an  equal 
percentage  of  premium  above  par. 


FINANCING  DOUBTFUL  ENTERPRISES       141 

Statement  as  of  September  1st,  1921 
(Estimated  after  giving  .effect  to  present  financing.) 
Assets  Liabilities 

Land,     buildings,  Mortgage    Bonds, 

machiner  J',  (this  issue) $1,200,000 

equipment,  etc .  $2,400,000 
Cash  from  deposit  Deposits  on  lease 

on  leases  (est.) .        50,000  (est.) 50,000 

Capital  Stock — 

Preferred 177,500 

*Common 1,000,000 

Surplus 22,500 

Total $2,450,000  Total $2,450,000 

*$1,200,000  additional  common  stock  authorized  for  the  purpose  of 
redeeming  bonds. 

The  proceeds  of  this  bond  issue  it  is  estimated  will  be 
sufficient  to  pay  off  all  indebtedness  and  finish  and  equip  the 
buildings  so  that  the  company  will  start  business  owning  the 
property  subject  only  to  this  issue  and  with  no  debts  of  any 
kind  outstanding,  leaving  all  net  profits  available  for 
dividends. 

Revenue  from  leases  and  rents  (without  theatre  profits) 
to  amount  to  $125,000,  is  about  1}^  times  interest  require- 
ments on  this  bond  issue. 

Price  100%  and  Interest 
Denominations  $1,000  and  $500 

Questions 

1.  What  is  your  estimate  of  the  claims  made  by  the 
State  Theatre  Company  at  the  end  of  1920? 

2.  As  a  general  proposition,  which  theatre  should 
you  expect  to  be  most  successful  financially — a  large 
one  or  a  small  one? 

3.  How  do  you  account  for  the  first-mortgage  bond 
issue  of  this  theatre? 

4.  Would  you  at  any  time  have  been  willing  to  buy 
the  securities  of  the  State  Theatre? 

5.  What  should  you  expect  to  be  the  financial  future 
of  such  an  amusement  house  launched  in  1921? 


142         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  42 

Problem  in  Securing  'Capital  to  Develop 

AN  Old  Gold  Mine 

Mr,  B.,  who  had  had  some  experience  in  other  pro- 
motion work  and  in  selling  stocks  of  a  speculative 
character,  was  approached  by  a  group  of  men  who  had 
formed  a  company  to  promote  a  gold-dredging  propo- 
sition in  one  of  the  western  states.  From  their  state- 
ments and  his  inquiries  through  a  competent  engineer, 
he  found  out  the  following  facts: 

The  property  in  question  had  been  originally  owned 
and  worked  in  the  50's  for  a  number  of  years  by  a 
"placer"  mining  company,  and  several  milhon  dollars' 
worth  of  gold  had  been  taken  from  the  location.  After 
the  accessible  benches  had  been  worked  out  the  prop- 
erty had  been  abandoned. 

In  the  90 's,  a  process  of  extracting  free  gold  from 
low-grade  gravel  was  successfully  evolved  in  California, 
Later  one  of  the  most  successful  of  the  men  engaged  in 
this  sort  of  mining,  who  had  properties  in  Alaska  and 
California,  sent  his  engineer  to  prospect  this  particular 
property.  The  engineer  found  that  there  was  a  large 
volume  of  low-grade  gravel  with  a  sufficient  supply  of 
ore  to  make  extraction  by  dredging  possible.  His  em- 
ployer purchased  the  property  from  the  rancher  who 
owned  it,  and  had  just  installed  a  small  dredge,  which 
had  been  previously  worn  out  in  the  Alaskan  fields, 
when  he  died,  leaving  the  property  to  his  several 
children.  His  sons  took  over  the  management  of  their 
father 's  Alaska  and  California  properties,  but  not  wish- 
ing to  bother  with  this  property,  offered  it  for  sale. 

The  engineer  who  had  prospected  the  location  for 
their  father  believed  it  was  a  profitable  property,  but 
was  unable  himself  to  purchase  it.  He  interested  two 
other  men,  whom  he  had  known  in  Alaska,  in  this  prop- 
osition. These  two  men  had  about  $40,000  between 
them.  Finally,  the  engineer  and  his  two  friends  incor- 
porated a  company  and  issued  to  themselves  400,000 
shares,  out  of  a  total  of  1,000,000  shares  of  common 
stock,  as  their  promotion  bonus. 


FINANCING  DOUBTFUL  ENTERPRISES      143 

This  company  next  executed  an  agreement  with 
the  heirs  of  the  property  to  purchase  it  for  $250,000, 
paying  the  $40,000  cash  which  they  had.  The  bal- 
ance was  to  be  paid  in  instalments  and  the  dredge 
was  to  be  allowed  to  stay  on  the  property  and  be 
operated,  the  proceeds  from  its  work  to  go,  one-half 
to  the  new  company  and  one-half  to  the  heirs,  until 
the  property  was  paid  for.  The  new  company 
had  a  year  in  which  to  pay  for  the  property  and 
the   dredge. 

The  members  of  the  new  company  attempted  to  sell 
the  stock,  but  failed  because  of  their  lack  of  experience  in 
this  line.  They  did  succeed,  however,  in  selling  20,000 
shares  at  $1  per  share.  In  addition,  they  managed  to 
borrow  about  $40,000  from  a  local  bank,  depositing  as 
collateral  most  of  the  remaining  stock.  Most  of  the 
money  realized  from  this  bank  loan  was  used  in  their 
attempts  to  promote  the  company,  in  selling  stock, 
and  so  on,  and  in  keeping  up  current  payments  on 
the  property  to  the  owners  as  the  instalments  fell  due. 
At  the  end  of  a  year  there  was  no  money  in  sight,  cur- 
rent payments  had  been  postponed,  and  they  were 
faced  with  the  alternative  of  raising  $200,000  or  let- 
ting the  property  revert  to  the  original  owners. 

Mr.  B.  had  been  approached  by  these  men  when  the 
company  was  first  beginning  to  get  into  financial  trou- 
bles. He  had  looked  the  proposition  over  and  refused 
to  touch  it  unless  he  had  control  of  the  company.  At 
this  point  he  was  called  in  for  the  second  time.  He 
believed  the  property  was  a  good  property  and  would 
produce  profits,  with  adequate  investment.  His  esti- 
mate was  that  in  addition  to  the  $200,000  needed  to 
pay  for  the  property,  there  should  also  be  raised 
$150,000  for  a  power  line  and  a  new  dredge,  the  old 
one  being  now  absolutely  worthless. 

Mr.  B.  engaged  a  competent  engineer  to  examine 
the  property  and  found  from  him  that  the  small 
dredge  had  been  able  to  produce  $445  worth  of  gold 
per  day  at  an  expense  of  $100  per  day.     The  recovery 


144  PROBLEMS  IN  BUSINESS  FINANCE 

during  the  time  that  this  old  dredge  had  been  operat- 
ing was  8I9I  per  cubic  yard.  The  content  was  about 
$1  per  cubic  yard. 

The  property  consisted  of  a  valley  five  miles  in 
length  and  about  one  thousand  feet  wide,  the  gold- 
bearing  sand  and  gravel  in  the  bottom  averaging  eight 
to  twenty  feet  in  depth.  About  seventy  prospect 
holes  were  sunk  throughout  the  length  and  breadth  of 
the  valley.  The  gravel  from  these  holes  showed  from 
709^  to  $1.21  per  cubic  yard.  These  prospects  were 
all  made  by  the  engineer  engaged  by  Mr.  B.  and  the 
result  seemed  to  be  perfectly  satisfactory. 

Mr.  B.  's  problem  was  to  raise  S350,000  capital  which 
would  enable  him  to  meet  the  final  payments  to  be 
made  to  the  original  owners,  and  to  install  an  up-to- 
date  dredge  as  well  as  a  power  line.  This  was  in  1919. 
Mr.  B.  could  raise  about  $50,000  on  his  own  account. 
The  balance  of  $300,000  must  be  secured  from  out- 
side sources. 

Questions 

1.  Should  you  expect  it  to  be  worth  while  to  attempt 
to  raise  further  capital  for  this  proposition?  Does 
the  date  affect  your  decision  ? 

2,  Granting  that  the  proposition  is  worth  while,  sug- 
gest, with  details,  the  best  method  of  raising  the  needed 
capital  at  this  time,  bearing  in  mind  the  various  in- 
terests involved? 

(References:     Jones,  Investments,  290-309;     Dewing,  Financial  Poli- 
cy, Vol.  II,  pp.  152-168.) 


FINANCING  DOUBTFUL  ENTERPRISES       145 

Problem  43 
The  Financial  Methods  of  a  Small  Oil  Company 

Late  in  1919  a  considerable  quantity  of  stock  was 
sold  in  the  Tex-La-Homa  Company,  largely  to  people 
of  moderate  means,  including  tradesmen  and  profes- 
sional people,  who  on  account  of  the  high  cost  of  liv- 
ing felt  that  the  return  which  they  received  from  their 
Liberty  Bonds  was  inadequate.  The  company  was 
pictured  to  be  in  a  most  flourishing  condition. 

One  or  two  dividends  are  said  to  have  been  paid. 
Shortly  after  the  next  dividend  was  due,  it  was  re- 
ported to  the  stockholders  that  one  of  the  officers  of 
the  company  had  been  dishonest  and  had  ''robbed" 
the  concern  of  many  hundred  thousand  dollars. 
Further  reports  indicated  that  the  company  was  in 
a  ''receiver's"  hands  by  the  end  of  1920.  Advices 
came  in  from  time  to  time,  however,  to  the  effect  that 
the  property  was  being  successfully  developed  and 
that  the  concern  would  soon  be  in  a  prosperous  con- 
dition once  more. 

Not  long  after  this  time,  some  of  the  stockholders 
received  the  following  letter: 

S.  Securities  Company 

Investments 

Commerce  Building 

Kansas  City,  Missouri. 

To  the  Stockholders  of  the 
Tex-La-Homa  Oil  Corporation: 

You  have  been  receiving,  for  some  time  past,  circulars 
from  different  concerns  requesting  you  to  send  money  to 
assist  them  in  protecting  your  interests.  It  is  quite  un- 
necessary for  us  to  mention  the  companies'  names  who  have 
constituted  themselves  in  some  instances  self-appointed 
"Protective  Committees,"  and  in  other  instances  trying  to 
form  committees  to  reorganize,  but  we  do  want  to  call 
attention  of  the  stockholders  to  the  fact  that  J.  R.  S.  & 
Company*  has  for  the  past  eight  months  been  represent- 
ing the  stockholders  who  are,  to  a  large  extent,  clients  of 
this  house,  without  requesting  any  contribution  whatsoever. 

*  Initials  used  throughout  for  obvious  reasons. 


146  PROBLEMS  IN  BUSINESS  FINANCE 

The  expenses  tluit  we  have  uicurred  in  looking  after  your 
interests  are  exceedingly  heavy  (we  are  heavy  stockholders 
in  Tex-La-Homa  Oil  Corporation),  but  we  have  not  asked 
you  to  send  us  one  dollar  to  assist  in  defraying  these  expenses. 

We  bought  tens  of  thousands  of  dollars'  worth  of  stock, 
both  Preferred  and  Common,  and  are  today  one  of  the 
largest  stockholders  in  the  Tex-La-Homa  Oil  Corporation. 
Naturally,  we  are  interested  in  seeing  some  means  or  plans 
worked  out  that  will  protect  everybody,  and  without  going 
into  details  would  state  that  at  the  present  a  reorganiza- 
tion of  both  Corporations  is  under  consideration  by  bankers 
holding  the  Corporation's  notes.  Also  by  the  directors  and 
endorsers  for  the  Corporation  who  are  working  in  connection 
with  your  dulj^  appointed  Stockholder.^'  Committee  of 
Boston,  headed  by  Mr.  H.  C.  G.,  Chairman. 

It  is  our  belief  that,  without  cjuestion,  a  reorganization 
of  Globe  and  Tex-La-Homa  will  be  effected  within  a  very 
few  weeks,  and  an  announcement  will  be  made  to  each  and 
every  stockholder  by  the  Trustees  in  Bankruptcy  just  as 
soon  as  the  plan  has  been  definitel}'  worked  out  and  deter- 
mined upon. 

Pending  receipt  of  authentic  information  either  from  the 
trustees  in  Bankruptcy  or  Mr.  G.'s  committee  in  Boston,  we 
would  suggest  and  recommend  that  the  Tex-La-Homa  stock- 
holders pay  no  attention  whatever  to  information  coming 
from  any  other  source  and  especially  those  who  are  asking 
for  contributions. 

J.  R.  S.  &  Company  is  doing  everything  in  their  power  to 
effect  a  reorganization  which  will  mean,  in  the  long  run  we 
hope,  the  working  out  of  all  intere.sts  concerned  without  any 
loss  whatsoever. 

Less  than  six  months  ago,  the  writer  and  his  associates 
organized  the  S.  Securities  Company. 

At  that  time  we  believe  we  offered  you  an  opportunity 
to  join  with  us  when  the  stock  could  be  obtained  at  the  first 
price  of  $10  per  share.  In.  less  than  six  months  we  have 
declared  five  monthly  2  per  cent  cash  dividends,  making  a 
total  cash  return  of  10  per  cent.  We  have  paid  10  per  cent 
stock  dividends,  making  total  dividends  for  less  than  six 
months,  20  per  cent,  and  we  have  increased  the  value  of 
the  stock  where  today  we  believe  it  is  worth  twice  what  we 
originally  sold  it  for — all  of  this,  mind  you,  in  less  than  six 
months'  time. 

Today,  the  S.  Securities  Company  is  a  closed  corporation. 
There  isn't  any  stock  for  sale.  Our  stockholders  are  more 
than  pleased  with  the  success  which  we  have  gained  for 
them.     Our  cash  dividends  of  2  per  cent  per  month  have 


FINANCING  DOUBTFUL  ENTERPRISES      147 

been  earned  for  many  months  in  advance.  We  have  piled 
up  a  substantial  reserve — we  have  many  different  oil  proper- 
ties— we  have  substantial  production,  and  we  are  a  success- 
ful, live,  going  concern  today.  More  than  that,  we  anticipate 
some  very  generous  disbursements  to  our  stockholders  in 
the  near  future. 

This  is  not  the  sort  of  results  you  obtained  through  your 
investment  in  Tex-La-Homa.  The  fact  that  Tex-La-Homa 
was  not  a  tremendous  success  is  not  the  fault  of  the  writer 
nor  this  organization. 

Management,  is  the  secret  of  success  in  any  enterprise, 
whether  it  be  oils,  industries,  or  banking.  I  have  succeeded 
in  my  own  business  right  here  in  the  Commerce  Building 
during  the  past  eleven  years.  I  have  sold  millions  and  mil- 
lions of  dollars'  worth  of  high-class  bonds  and  dividend- 
paying  stocks,  and  the  only  company  whose  securities  have 
been  offered  by  the  house  of  S.,  that  as  yet  have  not  proven 
successful,  are  the  securities  of  the  Tex-La-Homa  and  Globe. 

I  reiterate  that  the  failure  of  these  companies  to  make 
good  cannot  be  charged  to  this  office.  I  take  a  pardonable 
pride  in  the  fact  that  out  of  the  one  hundred  and  seventy- 
five  different  issues  of  municipal  bonds  and  high-grade 
securities,  every  investor  through  this  house  has  found  his 
principal  and  interest  paid  when  due,  and  found  his  invest- 
ment a  profitable  one,  with  possil:)ly  one  exception. 

I  don't  want  a  single  dissatisfied  customer  in  the  house  of 
S.  I  don't  want  to  sell  any  living  man  a  security  that  will 
not  prove  a  profitable  investment.  I  feel  very  keenly  the 
Tex-La-Homa  situation.  By  reason  of  this  fact,  and  actuated 
by  a  desire  to  prove  of  real  assistance  to  you,  the  following 
proposition  is  being  outlined  for  your  consideration,  and  your 
acceptance  or  rejection  promptly  is  earnestly  solicited. 

If  there  ever  was  an  opportunity  in  the  world  to  engage 
profitably  in  the  production  of  crude  oil,  today  is  that  day. 
A  dollar  today  in  the  oil  industry  will  do  the  work  of  ten. 
Now  the  opportunity  is  right  here  for  a  body  of  men,  club- 
bing together  and  putting  their  money  in  one  pot,  to  build 
up  a  real,  independent  oil  company  that  can  be  made  most 
profitable  for  all  concerned.  We  have  for  months  been  work- 
ing along  these  very  lines.  We  have  secured  options  and  we 
have  negotiations  pending  for  some  most  excellent  properties. 

We  are,  at  the  present  time,  organizing  a  new  corporation 
which  will  be  managed  along  the  lines  that  we  have  found 
successful  in  the  S.  Securities  Companj^ — a  company  whose 
office  will  be  right  in  the  Commerce  Building  with  its  records 
and  its  books  and  its  cards  on  the  table — a  company  that 
will  furnish  to  every  stockholder,  complete  information  and 
actual  facts  regarding  its  affairs  at  all  times— a  company 


148         PROBLEMS  IN  BUSINESS  FINANCE 

that  will  treat  ov(M-y  stockhoUk'r  as  a  partner  in  the  institu- 
tion, consuItinK  his  wishes  and  listening  to  his  suggestions — 
not  a  company  officered  by  a  few  nu>n  attempting  to  "hog" 
it  all. 

This  comiianv,  yet  unnamed,  is  to  be  organizetl  along  fair 
and  square  lines,  with  a  guarantee  of  a  square  deal  to  everj'- 
one.  How  much  money,  or  how  little  money,  it  will  make 
remains  to  be  seen.  Whatever  the  facts  are,  every  stock- 
holder will  know.  Whatever  the  profits  may  be,  he  will 
receive  his  pro  rata  share. 

This  compan}'  will  have  two  classes  of  stock — an  8% 
preferred  profit-sharing  stock,  and  a  common  stock  of 
nominal  or  no  par  value.  The  writer  is  to  receive  a  large 
block  of  this  common  stock  for  services  rendered,  and  for 
certain  options  and  properties  that  will  be  turned  over  to 
the  company.  This  will  be  the  individual  stock,  issued  to 
and  lielonging  to  J.  R.  S.  I  am  not  at  this  time  writing  you 
or  suggesting  that  you  subscribe,  or  purchase  am'  of  the 
stock  of  this  company. 

I  am  going  to  give  you  an  interest  in  this  corporation.  I 
am  going  to  give  it  to  you  out  of  my  own  personal  stock. 
For  every  share  of  Tex-La-Homa  preferred,  par  value  $100, 
that  you  may  own,  you  may  have  100  shares  of  mj--  stock 
(common)  in  this  new  company,  and  for  every  share  of  Tex- 
La-Homa  (common)  that  you  own,  you  may  have  50  shares 
of  my  stock  (common).  I  only  ask  that  you  forward  5c 
per  share  of  the  new  stock,  or  at  the  rate  of  $5  per  share  on 
your  Tex-La-Homa,  which  money  will  partly  reimburse  me 
for  my  expense  in  organizing  this  company  and  in  securing 
the  options  and  properties  that  I  will  turn  over  to  the 
company. 

None  of  the  preferred  stock  of  the  new  company  is  to  be 
sold  for  less  than  par,  and  it  is  this  preferred  stock  that  will 
provide  the  money  with  which  to  finance  the  company. 
Common  stock  is  in  reahty  bonus  stock,  or  promotion  stock, 
or  anything  that  you  may  like  to  call  it.  I  am  banking  on 
its  being  worth  a  ver}'  great  deal  of  money,  and  not  only 
recoup  me  for  the  money  I  may  lose  in  Tex-La-Homa,  but 
also  giving  you  an  opportunity  to  secure,  without  cost  to 
you,  a  stock  that  should  make  you  more  monej^  during  the 
next  year  than  we  ever  invested  and  lost  in  Tex-La-Homa 
(and  I  don't  think  we  will,  for  there  is  j^et  a  great  chance 
for  Tex-La-Homa  to  'oe  put  back  on  its  feet). 

Now,  I  don't  want  you  to  feel  that  you  are  exchanging 
Tex-La-Homa  stock  for  the  stock  of  this  new  company. 
That  isn't  the  idea.  1  want  you  to  keep  your  Tex-La-Homa 
stock.  I  am  keeping  mine.  I  am  giving  you  this  oppor- 
tunity to  share  part  of  the  holdings  that  are  coming  to  me 


FINANCING  DOUBTFUL  ENTERPRISES      149 

in  this  new  company,  for  the  reason  that  I  believe  this  new 
stock  will  make  you  some  money,  and  will,  in  turn,  enable 
you  to  say  within  a  year  from  today  that  you  never  lost  a 
dollar  through  the  house  of  S. 

Don't  get  the  idea  that  I  am  posing  as  a  philanthropist, 
because  I  am  not.  I  am  doing  this  for  purely  good,  selfish 
business  reasons.  If  I  had  the  money  today  I  would  buy 
everj'^  share  of  Tex-La-Homa  stock  that  you  have  and  pay 
cash  for  it — the  full  amount  of  cash  you  paid  for  it^and  I 
believe  that  I  would  l)e  doing  good  business  by  doing  so. 

I  have  been  in  business  right  here  for  the  past  eleven 
years  and  I  expect  to  be  hei-e  a  great  many  years  more.  I 
certainly  believe  that  your  friendship  and  your  patronage  is 
worth  more  to  me  than  the  amount  of  money  you  invested 
in  the  Tex-La-Homa. 

Now,  if  I  can  lead  this  new  company  to  success,  and  I 
believe  that  I  can  with  the  assistance  of  my  able  associates, 
and  if  I  can  take  this  stock  I  am  giving  to  you  from  my  own 
personal  holdings  and  make  it  of  real  value  to  you,  then 
regardless  of  the  outcome  of  Tex-La-Homa  you  will  be  unable 
to  say  that  you  ever  lost  a  dime  through  the  house  of  S. 

I  am  telling  you  frankly  what  I  can  do,  how  I  will  do  it, 
and  why  I  will  do  it.  I  am  not  even  going  to  suggest  that 
you  take  advantage  of  this  offer  that  I  am  making.  I 
wish  you  would  read  this  letter  over  carefully,  weigh  the 
matter  in  3^our  own  mind,  and  decide  for  yourself  whether 
or  not  you  wish  to  accept  the  portion  of  my  stock  that  you 
will  be  entitled  to  under  this  arrangement,  at  a  nominal  cost 
to  you,  which  will  merely  represent  a  small  proportion  of  the 
organization  and  incidental  expense. 

Thanking  you  for  the  past  favors  and  awaiting  your  early 
reply,  I  am 

Yours  verv  truly, 

J.  R.  S. 
President. 

Some  time  after  this  letter  had  been  sent  out,  an 
"investment"  house  in  New  York  sent  a  letter  to 
stockholders  of  the  Tex-La-Homa  Company  stating 
that  it  was  reported  to  them  on  good  authority  that 
J.  R.  S.  was  making  valiant  efforts  to  improve  the 
financial  condition  of  the  company.  They  stated 
that  there  was  every  reason  to  believe  that  within  a 
short  time  losses  would  be  made  good  and  dividends 
would  be  resumed. 


150  PROBLEMS  IN  BUSINESS  FINANCE 

This  New  York  house  also  suggested  that  it  had  for 
sale  a  limited  amount  of  the  preferred  stock  of  the 
Tex-La-Homa  Company  which  had  a  par  value  of 
$100,  but  which  they  would  be  willing  to  sell  to 
common  stockholders  at  the  rate  of  $2.25  per  share,  if 
they  would  purchase  immediately.  It  was  further 
stated  that  the  stock  would  no  doubt  be  "brought  to 
par"  in  the  near  future. 

It  was  represented  by  this  ''investment"  house  that 
they  were  fellow  sufferers  in  the  Tex-La-Homa  diffi- 
culties and  that  they  were  now  mereh^  passing  the 
"good  word"  along,  so  that  a  few  stockholders  who 
had  lost  on  the  common  might  recoup  themselves  by 
buying  a  very  limited  amount  of  preferred.  For  the 
convenience  of  the  recipient  of  the  letter,  also,  a 
telegraph  blank  was  enclosed,  properly  filled  out  and 
requiring  only  the  signature  of  the  prospective 
customer. 

A  number  of  the  Tex-La-Homa  stockholders  im- 
mediately sent  in  their  order  for  their  "allotment"  of 
the  preferred  stock. 

In  June,  1921,  an  attempt  was  made  to  find  out 
something  more  definite  regarding  the  J.  R.  S. 
Securities  Company  as  well  as  the  Tex-La-Homa  Com- 
pany. In  reply  to  an  inquiry  sent  to  a  well-known 
and  thoroughly  dependable  source  of  information  in 
Kansas  City,  the  following  letter  was  received: 

Kansas  City,  June  18,  1921. 
Dear  Sir : 

I  regret  that  we  cannot  tell  you  much  about  the  inside 
workings  of  the  Tex-La-Homa  Oil  Company.  Mr.  J.  R.  S., 
of  the  S.  Securities  Company,  Commerce  Building,  Kansas 
City,  Missouri,  assures  us  that  his  company  lost  heavily 
in  this  company,  which  went  into  the  hands  of  the  receivers, 
and  that  they  are  trying  with  might  and  main  to  recover 
what  is  possible  from  the  company  for  the  benefit  of  stock- 
holders. 

The  S.  Company,  we  understand,  are  putting  through 
some  wells  in  Louisiana  and  it  is  apparently  with  the  idea 
of  interesting  Tex-La-Homa  stockholders  in  the  Louisiana 
proposition  that  they  are  offering  subscriptions.  This  plan 
is  one  which  is  used  by  a  number  of  companies  in  the  oil- 


FINANCING  DOUBTFUL  ENTERPRISES      151 

promotion  business  who  offer  an  opportunity  to  stockholders 
in  a  new  company  when  they  have  been  losers  in  a  former 
enterprise. 

Of  course,  the  oil  business  as  carried  on  by  promotion 
companies  is  more  or  less  of  a  gamble  and  there  is  no  telling 
until  the  drill  hits  the  oil  sand  whether  your  money  is  lost 
or  not.  Even  if  oil  is  struck,  sometimes  bad  management 
on  the  company's  part,  or  the  greed  of  some  insider,  may 
filch  from  the  company  the  legitimate  earnings  of  the 
stockholders. 

The  attached  bulletin  issued  by  this  Bureau  last  fall  will 
give  you  a  little  idea  of  the  methods  of  promoters  in  the 
oil  business.  One  of  the  big  promoters  cited  in  this  bulletin 
— Mr.  N.  F.  W.,  who  was  connected  with  the  J.  R.  S.  Com- 
pany, has  been  driven  from  this  city,  and  S.  claims  that  W. 
defrauded  him  before  he  got  through  with  W.,  and  had  he 
known  W.'s  true  character  he  would  not  have  allowed  him 
to  associate  with  his  concern. 

I  regret  that  we  cannot  give  you  any  more  information 
about  Tex-La  Homa. 

There  is  such  a  maze  of  contradictions  about  Tex-La- 
Homa's  affairs  that  we  doubt  whether  anyone  can  with 
certainty,  at  this  stage,  tell  exactly  what  the  standing  of  the 
company  is. 

Questions 

1.  What  is  your  opinion  of  the  original  financing  and 
the  present  position  of  the  Tex-La-Homa  Company? 

2.  What  is  your  estimate  of  the  financial  standing 
of  the  S.  Company? 

3.  Would  you  be  willing  to  "take  a  chance"  on 
any  of  the  stock  above  described? 


152         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  44 
Advertising  for  Capital 

Out  of  about  100  advertisements  for  "Capital 
Wanted, "  appearing  in  a  prominent  New  York  paper 
on  April  17,  1921,  the  following  are  selected  for  pur- 
poses of  discussion: 

1. — Progressive  fancy  knit-goods  house,  in  order  to 
branch  out,  desires  a  wide-awake  salesman  who  can  invest 
S25,000;  open  for  closest  investigation;  exceptional  oppor- 
tunity. 

2. — Established  concern,  manufacturing  and  selling 
well-known  line  cosmetics,  needs  additional  capital  to  branch 
out;  will  consider  offers  with  or  without  active  services. 

3. — Business  Man  with  $5,000  and  services  wanted  to 
join  inventor  manufacturing  and  selling  meritorious  $5 
appliance;  unlimited  field,  big  demand. 

4. — Sales  Manager — Cigar  manufacturing  concern  need- 
ing additional  capital,  has  an  opening  for  a  party  who  will 
invest  $5,000  to  $10,000;  will  pay  salary  and  10%  on  invest- 
ment; only  capable  man  with  references  need  apply. 

5. — Opportunity — Good  income  on  small  investment; 
publisher  periodical  wishes  to  obtain  $5,000;  will  issue 
preferred  stock  cover  same;  also  guarantee  by  second 
mortgage  on  home  worth  $20,000  above  first  good  bonus. 

6. — Well-Established  business  manufacturing  special 
product  national  in  scope.  Beginning  rapidly  to  attain 
popularity,  desires  additional  capital  with  or  without 
services,  to  handle  the  increased  business;  substantial  profits 
already  shown;  fullest  investigation  asked. 

7. — Partner  or  capital  wanted  to  build  corporation  to 
finance  surprising  novelty;  new  system  to  make  decorative 
painting  like  silk  on  furniture;  best  investment;  enormous 
profits;  no  agents;  sample  furniture  on  exhibition. 

8. — Wanted — Party  with  $100,000  to  finance  patented 
snap  fasteners  used  on  clothing,  gloves,  etc.;  revolutionary 
in  principle,  with  many  advantages  and  big  saving  in  cost 
of  production  over  present  type. 

9. — Advertiser  desires  a  party  who  can  invest  or  furnish 
$50,000  to  develop  and  build  homes  within  the  limits  of  the 
City  of  New  York,  5  to  12  minutes'  walk  to  two  railroad 
stations;  30  minutes  to  Pennsylvania  Station. 


FINANCING  DOUBTFUL  ENTERPRISES      153 

10. — Moving  Picture  Theatre  on  busiest  street  in 
Boston,  Mass.;  have  thirty-year  lease;  figuring  lowest 
admission  and  highest  expenses,  weekly  net  profits  are  over 
$1,000;  need  one  or  more  with  $100,000  for  renovating; 
I  am  in  N.  Y.  now. 

11. — Unusual  Opportunity — Investor  join  group  to 
finance  corporation  combining  some  of  largest  firms  in 
certain  supply  lines;  merger  assures  excellent  earnings; 
personnel  highest;  endorsed  by  leading  men;  principals  only. 

12. — Manufacturing  Business,  well  established,  needs 
capital  for  expansion;  articles  thoroughly  covered  by  patents; 
growing  too  rapid  under  present  working  conditions;  strict 
investigation  invited. 

13. — Corporation  owning  valuable  U.  S.  and  foreign 
patent  rights  on  automatic  machinery  for  important  indus- 
try, desires  investment  of  $5,000  to  $50,000;  take  active 
part  in  business  if  desired;  unlimited  possibilities. 

14. — An  Experienced  Builder  desires  a  party  who  can 
invest  or  furnish  $25,000  to  build  one-family  houses,  30 
minutes  from  Pennsylvania  Station;  building  loans  arranged 
for. 

15. — Wanted,  a  partner  in  a  wholesale  bakery,  with 
$15,000  to  $20,000;  present  drawings  $75  per  week;  $10,000 
yearly  profit;  business  man  only  preferred. 

16. — Wanted  in  a  Legitimate  Real  Estate  Business 
IN  Nassau  County,  L,  I.,  partner  with  $10,000  to  $12,000; 
practical  builder  preferred;  advertiser  is  thoroughly  expe- 
rienced and  will  invest  equal  amount;  money  to  be  used 
solely  for  house  construction  and  secured  by  mortgage; 
will  bear  searching  investigation. 

17.— Gentleman  with  capital,  $20,000  to  $30,000,  as 
partner  in  jobbing  business;  must  be  active  and  give  full 
time;  $10,000  required  for  immediate  investment;  balance 
as  needed;  business  is  well  established  and  well  known;  full 
information  only  by  personal  interview;  this  proposition 
will  stand  the  fullest  investigation. 

18. — Food  Products — Manufacturer  highest  grade  food 
products  wishes  gentleman  to  invest  up  to  $15,000  in 
business  for  half  interest  and  working  capital,  preferably 
one  who  is  qualified  to  take  charge  of  finances  and  sales; 
concern  has  been  ten  years  in  the  business,  its  goods  are 
well  known,  but  working  capital  and  experienced  sales 
manager  are  needed;  principals  only. 


154         PROBLEMS  IN  BUSINESS  FINANCE 

19. — Owner  of  tire  factory  within  200  miles  of  Now 
York,  capable  of  producinp;  about  22,000  tires  this  season, 
wishes  to  meet  party  with  $15,000  who  will  receive  one-third 
interest ;  this  money  is  needed  for  operations ;  about  one-half 
of  production  is  sold  at  good  profit;  factory  can  clear  about 
$40,000  this  year.  Do  not  answer  unless  j'ou  have  money 
required. 

20. — Executive  Partner  Wanted  for  well-established 
high-class  specialty  shop  carrying  millinery,  gowns,  and 
wraps,  vicinity  57th  street  and  5th  avenue;  executive 
ability;  reference  and  conscientious  efforts  of  paramount 
importance;  will  bear  complete  investigation  as  to  character, 
experience  and  business  integrity;  investment  of  $30,000 
to  $40,000  required. 

21.: — Corporation  (Western  New  York),  an  old-estab- 
lished business,  protected  by  basic  patents,  requires  services 
of  experienced  business  executive,  able  to  finance  new 
selling  corporation  holding  exclusive  contracts,  to  put 
their  product  on  the  market  for  household  use;  unlimited 
market  to  develop  both  here  and  abroad;  only  requires 
introduction  to  become  household  staple;  goods  ready  for 
distribution;  capital  required,  $250,000. 

22. — Well-Established  sales  agency,  controlling  entire 
factory  outputs  of  two  substantial  products  (one  a  food 
product)  wants  an  active  man,  capable  of  taking  entire 
charge  of  sale  and  distribution  of  the  food  line;  must  have 
$5,000  to  $10,000  to  finance  sales;  right  man  can  secure  half 
interest  in  business. 

23. — Steel  Merchant  and  importer.  Christian,  repre- 
senting American  and  foreign  mills  in  Eastern  States,  many 
years'  clientele,  desires  partner  with  $15,000  to  $25,000 
additional  capital  to  arrange  New  York  stock  in  American, 
British  and  German  steel  specialties;  firm  agencies;  estab- 
lished since  1915;  fullest  confidence  guaranteed  and  asked; 
principals  only. 

24. — Established  leather  goods  house.  Al  selling  force, 
making  soft  fabric  bags  and  novelties,  looking  for  good 
sample  maker  and  all-around  man,  who  can  make  investment 
$3,000  to  $5,000;  wonderful  opportunity  for  right  man; 
will  stand  strict  investigation;  state  experience. 

25. — German  Import  House — Established  import  house; 
best  German  pre-war  connections,  representing  leading 
manufacturers'  staple  lines  in  this  country;  large  credits 
and  consigned  merchandise;  wants  partner  with  $15,000; 
unusual  opportunity. 


FINANCING  DOUBTFUL  ENTERPRISES       155 

26. — An  Opportunity  to  make  a  good  profit  on  an 
investment  of  $10,000  to  $15,000  for  the  period  of  four 
months;  money  secured  by  merchandise;  orders  on  hand; 
demand  for  merchandise  created  by  using  previously  proven 
and  successful  method ;  quick  action  necessary. 

27. — Wanted — Third  partner  in  newly  established  adver- 
tising business  with  unlimited  possibilities;  $5,000  to  $10,000 
cash;  preferably  man  who  wishes  to  make  an  investment 
rather  than  take  an  active  interest  in  business;  no  risk. 

28. — Partner  Wanted — Well-known  promoter  requires 
additional  working  capital  for  enlargement  of  his  business; 
an  attractive  proposition  will  be  made  to  one  who  is  capable 
of  making  a  substantial  investment;  best  banking  and  other 
references  exchanged. 

29. — Wanted — Party  with  Considerable  Capital  arid 
unquestioned  high  standing  to  help  launch  unique  publishing 
enterprise  susceptible  great  extension  and  large  financial 
returns. 

30. — Is  There  Such  a  Man? — Capable  office  manager 
having  the  following  qualifications:  able  to  earn  $5,000  per 
year;  possessing  vision  sufficiently  broad  to  enable  him  to 
pass  on  nation-wide  credits;  able  to  collect  accounts  and 
keep  customers'  goodwill;  ready  to  invest  $15,000  in  clean- 
cut  manufacturing  business  with  more  than  ordinary  profit 
possibilities;  able  to  become  congenial  associate  with  two 
young  men  who  have  already  invested  over  $75,000  in  cash 
in  business;  no  brokers;  personal  interview  arranged. 

31. — Associate  Wanted — Having  obtained  United  States 
agency  for  the  finest  French  automobile  and  truck  upon 
exceptional  terms,  I  require  the  cooperation  of  a  gentle- 
man or  organization;  $25,000  to  $50,000  required;  trucks 
in  New  York  now;  exceptional  opportunity  for  a  man 
with  vision  who  can  act  quickly. 

32.— Wanted— Wanted  to  borrow  $50,000  on  20,000,000 
feet  of  original  growth  large  yellow  pine,  located  in  the 
vicinity  of  Aiken,  S.  C,  35,000-foot-capacity  saw  mill,  3 
steam  dry  kilns,  electric  lighting  plant,  7  miles  standard- 
gage  logging  railroad,  2  steam  skidders;  low  freight  rate 
to  all  points  from  Norfolk  to  Boston,  which  advantage  is 
sufficient  to  pay  for  this  loan;  will  make  attractive  proposi- 
tion to  party  loaning  the  money. 

33. — A  Boston  Corporation  furnishing  insurance,  ap- 
praisal, engineering  and  management  service  to  many  high- 
grade  New  England  manufacturers  desires  to  expand  into 
the  New  York  field,  and  requires  services  of  a  really  big 


156  PROBLEMS  IN  BUSINESS  FINANCE 

business  man,  not  over  35  yeai's  old,  who  can  invest  in 
company  approximately  $50,000,  which  will  secure  a  large 
share  of  control;  business  was  started  six  years  ago  and  has 
doubled  its  income  everj^  year;  this  is  an  opportunity  which 
comes  but  once  for  the  right  man. 

34. — Prosperous  Business,  established  8  years,  supplying 
a  necessary  service  to  the  wealthy  families  of  Manhattan; 
all  cash,  no  credits,  no  losses,  no  debts;  my  net  profits  1920 
25%;  increasing  expansion  compels  my  purchase  of  larger 
building;  I  require  S25,000  additional  money  to  secure  an 
ideal  building  which  I  have  selected;  I  invite  an  associate 
to  join  me;  his  or  her  services  optional;  investment  secured; 
full  particulars,  highest  banking  and  social  references  fur- 
nished acceptable  associate. 

35. — Wanted,  partner  (lady  or  gentleman),  with  services 
and  $5,000  to  $10,000  for  enlarging  long-established  and 
prospering  art  embroidery  and  crochet  beading  trade  school; 
capital  necessary  for  materials  sold  pupils  during  course; 
lady  now  operating  school  has  long  years  of  practical  expe- 
rience and  many  excellent  ideas  that  with  required  capital 
will  prove  most  profitable;  business  will  stand  strictest 
investigation;  good  income  from  beginning;  business  refer- 
ences given  and  required. 

36. — A  Million  Dollar  chain  store  corporation,  operat- 
ing in  Pennsylvania  and  New  Jersey,  seeks  for  its  Brooklyn 
branch  which  it  is  about  to  establish,  a  plant  manager, 
credit  manager  and  sales  manager;  only  highest  calibre  men 
able  and  willing  to  invest  $5,000  will  be  considered;  we  have 
also  openings  for  several  high-grade  salesmen,  fully  expe- 
rienced, and  who  could  invest  $2,000.  Write,  giving  fullest 
details. 

37. — Man  with  $25,000  to  help  buy  out  retiring  interest 
in  staple  manufacturing  concern  to  fill  position  as  secretary; 
business  controlled  by  young  men;  the  potential  possibilities 
are  very  great;  it  is  necessary  to  have  a  man  associated  with 
the  company  who  has  funds  to  invest,  and  who  may  be 
capable  of  handling  the  financial  development  of  the  work 
as  the  volume  of  business  increases;  we  are  a  very  big  com- 
pany in  the  making;  we  wish  no  replies  from  brokers  or 
professional  introducers;  we  want  a  few  minutes'  audience 
with  a  man  who  can  qualify;  we  can  prove  up  our  end  to  his 
entire  satisfaction. 

Questions 
1.  After    a    careful    study    of    the   above   financial 
"ads,"  indicate  those  propositions  which  seem  to  you 


EMERGENCY  FINANCING  157 

deserving  of  financial  assistance  and  which  you  con- 
sider are  "safe"  propositions.  Indicate  clearly  the 
reasons  for  your  conclusions. 

2.  Under  what  circumstances,  if  any,  is  a  small 
business  concern  justified  in  endeavoring  to  secure 
new  capital  in  this  way? 

3.  Would  you  reach  the  same  conclusions  for  all 
tvpes  of  businesses  and  for  all  stages  in  the  Business 
Cycle? 


F.    RAISING  WORKING  CAPITAL  BY  THE 

METHODS  COMMONLY  USED  TO 

SECURE  FIXED  CAPITAL 

While  the  following  problems  might  logically  be 
presented  in  the  Chapter  on  Raising  Working  Capital, 
yet  inasmuch  as  these  methods  of  financing  are  those 
ordinarily  used  for  fixed  capital  financing,  it  is  thought 
best  to  include  them  in  this  chapter.  The  compu- 
tations which  are  called  for  in  the  third  of  these 
problems  will  be  very  valuable  as  a  preparation  for 
analysis  of  the  problems  in  Chapter  V. 

Problem  45 
Selling  Stock  by  the  Company 

The  C.  Rubber  Shoe  Company  found  its  business  at 
a  low  ebb  early  in  1921,  and  being  hard  pressed  for 
working  capital  attempted  to  sell  additional  preferred 
stock  to  the  public  direct.  The  company  achieved 
this  end  by  sending  out  on  a  selling  campaign  many 


158         PROBLEMS  IN  BUSINESS  FINANCE 

of  its  employees  for  whom  there  was  no  work  in  the 
factor}'.  Through  the  following  up  of  replies  to 
advertisements,  and  frequently  by  means  of 
house-to-house  canvassing,  the  company  sold  a  con- 
siderable quantity  of  stock,  though  this  would  have 
been  impossible  except  for  the  fact  that  the  concern 
was  well  known  in  the  locality.  This  stock,  paying 
7  per  cent  dividends,  was  sold  to  the  small  investor 
at  par.  The  previous  issue  of  preferred  stock  was 
not  listed  on  any  exchange,  but  from  time  to  time  sales 
were  being  made  on  the  open  market  for  less  than 
80  (par  100.) 

Questions 

1.  From  the  point  of  view  of  this  concern  what  seem 
to  you  to  be  the  advantages  or  disadvantages  of  fol- 
lowing the  policy  outlined? 

2.  Do  you  approve  of  a  company's  selling  its  stock 
directly? 

3.  Will  your  answer  differ  according  to  the  size  or 
age  of  the  concern,  the  kind  of  industry,  or  the  stage 
in  the  Business  Cycle? 

(Reference:     Lough,  Business  Finance,  291-318). 

4.  Would  it  be  easier  for  a  company  to  market  ''no 
par  value"  stock  than  stock  having  a  definite  par 
value?     Why? 

5.  Specifically,  what  are  the  arguments  for  or 
against  issuing  stock  with  no  par  value? 

(References:  Administration,  .January,  1921,  87-94;  Bonbright, 
Railroad  Capitalization,  100-131;  Conyngton,  Financing  an  Enterprise, 
385-400.) 


EMERGENCY  FINANCING  159 

Problem  46        J 
Raising  Working  Capital  for  a  Small  Rubber  Tire 
Company  Through  a  Preferred  Stock  Issue  at  the 
End  of  1919 

The  following  notice  of  a  new  preferred  stock  issue 
appeared  in  some  of  the  middle  western  papers  on 
November  6,  1919: 

$2,500,000. 

The Tire  &  Rubber  Company 

Factories:     E.  P.,  Ohio         General  Offices:  Cleveland,  Ohio. 

$2,500,000  7%  Cumulative  Sinking  Fund,  Preferred. 
5,000  shares  No  Par  Common. 

Both  Classes  exempt  from  the  Personal  Property 

Tax  in  the  State  of  Ohio  and  from  the 

Normal  Federal  Income  Tax. 

Par  value  of  Preferred  Stock  $100,  preferred  as  to  assets 
and  dividends.  Dividends  payable  quarterly,  January, 
April,  July  and  October  1st.  Redeemable  at  110  and  accrued 
dividends.  Dividends  on  the  preferred  stock  will  accrue 
from  October  1st. 

Capitalization 
(Upon  Completion  of  Present  financing) 

Authorized     Outstanding 

7%    Cumulative    Sinking    Fund 

Preferred  Stock $5,000,000        $2,500,000 

Common  Stock  (No  Par  Value) .  100,000  shs       100,000  shs 
No  Bonds  or  Mortgages 

We  call  attention  to  the  following  facts  given  in  a  letter 

to   us  from    the    i  resident   of   The Tire   &   Rubber 

Company: 

History — The Tire  &  Rubber  Company  plant  is 

located  at  E.  P.,  Ohio,  with  general  offices  in  Cleveland, 
Ohio.  The  Company  has  been  in  successful  operation 
for  ten  years,  and  manufactures  cord  and  fabric  automo- 
bile tires,  truck  tires  and  inner  tubes  of  the  highest  quality. 
The  growth  of  the  Company  is  evidenced  by  the  increase 
in  net  sales  from  $746,000  in  1912  to  over  $7,000,00 
(3  months  estimated)  in  1919. 

Purpose  of  Issue — The  entire  proceeds  of  this  issue, 
after  retiring  the  old  preferred  stock,  will  be  used  as  working 


160  PROBLEMS  IN  BUSINESS  FINANCE 

capital,  and  will  be  applied  against  the  Company's  current 
indebtedness. 

Assets — After  giving  effect  to  the  present  financing,  the 
Company's  statement  shows  net  quick  assets  of  S138  per 
share  and  net  tangible  assets  of  $193  per  share  for  each 
share  of  preferred  stock.  Quick  assets  amount  to  four  times 
current  liabilities.  The  net  tangible  asset  value  of  the 
common  stock  is  $23.25  per  share.  A  recent  apj:)raisal  made 
by  the  American  Appraisal  Company  shows  the  present 
value  of  the  Company's  plant  to  be  approximately  $458,000 
in  excess  of  the  valuation  carried  in  the  balance  sheet. 

Earnings — The  average  net  earnings,  certified  by  Ernst  & 
Ernst,  for  5  3'ears  and  9  months  ending  August  31,  1919, 
after  Federal  taxes,  and  allowing  for  interest,  have  been 
$503,360,  or  nearly  three  times  the  annual  dividend  re- 
quirements on  this  preferred  stock  issue.  The  estimated 
earnings  for  1919,  based  upon  the  report  of  Ernst  &  Ernst 
for  9  months,  are  $573,980,000.  After  payment  of  the  divi- 
dend on  the  preferred  stock,  this  amounts  to  $4  a  share 
for  the  common  stock. 

Redemption — During  each  year  ending  June  30,  1921, 
1922  and  1923,  2>^%  of  the  largest  amount  of  preferred 
stock  at  any  one  time  outstanding  and  annually  thereafter, 
an  amount  equal  to  10%  of  net  earnings  shall  be  redeemed 
at  110  and  accrued  dividend,  by  lot  or  by  purchase  in  the 
open  market.  It  is  provided,  however,  that  such  amounts 
after  1923  shall  not  be  less  than  5%  of  the  largest  amount 
of  preferred  stock  at  any  one  time  outstanding. 

Protective  Features — The  preferred  stock  of  the  com- 
pany will  have  the  following  characteristics: 

No  mortgage  shall  be  placed  on  any  of  its  property. 

Net  quick  assets  of  100%  and  net  tangible  assets  of  180% 
of  the  largest  amount  of  preferred  stock  at  any  time  out- 
standing shall  be  maintained. 

Restrictions  regarding  issuance  of  the  remainder  of  the 
authorized  preferred  stock. 

Management — The  present  management  of  the  company 
is  in  the  hands  of  the  same  men  who  were  responsible  for 
its  past  success. 

The  accounts  have  been  audited  by  Messrs.  Ernst  &  Ernst, 
certified  public  accountants. 

$1,000  and  accrued 

Price,  10  shares  Preferred  Stock  I   dividends   on   the 

2  shares  Common  Stock]    Preferred       Stock 

from  October  1st. 


FINANCING  DOUBTFUL  ENTERPRISES       161 

In  this  connection,  it  should  be  explained  that  the 

Tire  &  Rubber  Company  paid  dividends  of 

about  12%  on  the  market  value  of  its  common  stock 
during  1917  and  1918.  After  the  first  quarter  of  1919 
no  further  dividends  were  paid.  During  this  time, 
however,  the  officers  of  the  concern  were  receiving  the 
usual  war-time  salaries,  a  number  of  them  being  paid 
amounts  ranging  from  $20,000  to  $40,000.  The 
amount  of  "old"  preferred  stock  outstanding  was  at 
this  time  negligible. 

Questions 

1.  What  is  your  opinion  of  a  tire  concern  which 
finds  it  necessary  to  secure  working  capital  by  a 
preferred  stock  issue  at  this  time? 

2.  Analyze  critically  the  above  prospectus.  What, 
if  anything,  is  lacking? 

3.  How  do  you  expect  the  finances  of  this  concern 
to  stand  at  the  beginning  of  1921? 


Problem  47 

General  Problem  in  Alternative  Methods  of  Raising 

New  Working  Capital  for  an  Old  Concern, 

Through  Public  Security    Issues 

The  R.  Company,  well  known  in  New  England,  is  a 
relatively  small  subsidiary  of  a  very  large  and  strong 
national  concern.  It  is  engaged  in  processing  some 
of  the  important  by-products  of  the  parent  industry. 
In  January,  1921,  the  company  furnished  the  following 
financial  statement: 


162  PROBLEMS  IN  BUSINESS  FINANCE 

Statement  of  the  R.  Company 

January,  1921 

Assets 

Real  estate,  buildings,  machinery,  eio^ $  650,000 

Inventory. .  .  .^ 800,000 

Accounts  receivable  .'TT 500,000 

Notes  receivable . .  T^ 50,000 

Cash.  .< y. 150,000 

Liberty  Bonds  (at  market)  .< 10,000 

Russian  and  German  Government  bondsY<^.  ....  10,000 

Stocks  and  bonds  of  industrial  companies  .'<^ 50,000 

Prepaid  insurance  and  rent 5,000 

Total ."$2,2257)06 

Liabilities 

Common  stock  (par  $100) ./ $  500,000-^ 

Notes  payable  (bank  loans) .  <<^ 800,000  ^ 

Accounts  payable.^ 200,000 

Accrued  wages.  ..<'..  .^. 5,000 

Accrued  local  taxes. < 10,000^ 

Reserve  for  bad  debts,  ff 20,000 

Reserve  for  decline  in  inventory  value  X. ,  100,000 

Reserve  for  reduced  value  of  Russian  bonds  <^.  .  .  8,000 

Reserve  for  reduced  value  industrial  stocks  r^^.  .  .        20,000 

Reserve  for  Federal  income  tax . . . .  rT 50,000 

Reserve  for  depreciation  of  plant.  ^. 150,000 

Surplus  (undivided  profits) 362,000 

Total $2,225,000 

It  further  appears  that  the  net  profits  of  the  R. 
Company  available  for  interest  on  floating  debt,  div- 
idends and  the  like,  over  a  period  of  three  years  have 
averaged  $168,000  per  annum.  The  business  of  the 
company  is  relatively  free  from  seasonal  fluctuations, 
and  is  not  ordinarily  much  affected  by  changes  in  the 
Business  Cycle. 

Exercises 

A.  Set  up  the  Assets  and  Liabilities  of  the  company  as 
shown  on  the  above  balance  sheet  so  as  to  show  in  the 
usual  manner  the  following: — 

1.  The  total  assets. 

2.  The  quick  (or  "cuirent")  assets. 

3.  The  total  net  assets  ("net  worth'')- 


EMERGENCY  SECURITY  ISSUES  163 

4.  The  quick  (or  "current")  liabilities. 

5.  The  net  quick  (or  "current")  assets  (sometimes  called 

"working  capital"). 

6.  The  total  indebtedness  of  the  company. 

7.  The  book  value  of  the  common  stock. 

8.  Ratio  of  current  assets  to  current  liabilities  ("current" 

or  "quick"  ratio). 

B.  In    the    light    of    your    revised    balance    sheet, 
answer  the  following  questions: 

Questions 

1.  Does  the  R.  Company  need  any  new  financing? 

2.  Is  the  R.  Company  in  a  position  to  seek  further 
outside  financial  assistance? 

3.  Assuming  that  the  R.  Company  does  need  some 
refinancing,  what  methods  appear  to  be  open  to  it? 


C.  As  a  matter  of  fact,  the  R.  Company  in  the 
spring  of  1921  did  go  to  a  well-known  investment 
banking  house  in  the  city  of  Boston  with  a  view  to 
effecting  some  new  financing  in  order  to  improve  its 
current  position.  The  three  following  alternatives 
were  considered  by  the  investment  house: 

(a)  The  possibility  of  funding  all  the  notes  payable 
(bank  loans)  into  an  unsecured  "debenture"  note  issue 
running  from  ten  to  fifteen  years  at  about  8  per  cent. 

(h)  The  possibility  of  funding  only  one-half  of  the 
notes  payable,  or  $400,000,  by  creating  a  first  mort- 
gage on  the  assets  of  the  R.  Company.  (Why  not  on 
the  "fixed"  assets  only?) 

(c)  The  possibility  of  taking  up  one-half  of  the 
notes  payable  by  the  creation  of  a  first  mortgage  as 
indicated  above  (6),  and  retiring  the  remainder  out  of 


164  PROBLEMS  IN  BUSINESS  FINANCE 

the  proceeds  of  the  sale  of  preferred  stock  either  to 
existing  stockholders  or  to  new  investors. 

Based  on  the  information  already  given,  what  are 
your  answers  to  the  following  questions: 

Questions 

1.  Which  of  the  proposed  methods  of  financing 
would  leave  the  R.  Company  in  the  strongest  position 
so  far  as  its  senior  security  holders  are  concerned? 

2.  Which  method  of  financing  do  you  suppose 
would  be  most  feasible? 

3.  Can  you  suggest  any  alternative  methods  which 
seem  to  you  more  satisfactory  than  any  of  the  above? 

4.  In  the  light  of  the  facts  given,  and  your  knowledge 
of  general  conditions,  do  you  expect  that  the  invest- 
ment house  applied  to  for  assistance  decided  to  put 
through  any  new  financing  for  this  concern? 

5.  Assuming  that  the  investment  house  refuses  to 
assist  the  company,  what  steps  should  you  advise  them 
to  take? 

(References:  CoUver,  Greendlinger,  Jones,  or  the  '"Introduction"  to 
Moody's  Analyses  of  Industrial  Securities.) 


CHAPTER  IV 

THE  PROBLEMS  OF  RAISING  FIXED 

CAPITAL  {Continued):    CUSTOMER 

OWNERSHIP  AND  EMPLOYEE 

OWNERSHIP 

WITHIN  recent  years  much  interest  has  been 
shown  in  the  question  of  seUing  stock  to  cus- 
tomers and  employees  of  business  concerns. 
Many  pubhc  utiUty  companies  and  some  industrials 
have  marketed  securities  widely  to  the  users  of  their 
service  or  product.  The  movement  in  favor  of  giving 
the  employee  a  vested  interest  in  the  company  for 
which  he  works  is  even  more  marked. 

The  motives  back  of  this  movement  are  varied. 
However,  the  more  obvious  gains  which  companies  may 
derive  from  these  newer  policies  are  probably  three- 
fold. First,  to  sell  stock  to  customers  or  employees  is 
sometimes  a  comparatively  easy  and  cheap  method  of 
raising  additional  funds.  Secondly,  in  times  when  pub- 
lic agitation  is  frequently  directed  against  business  con- 
cerns, it  may  be  highly  advantageous  to  have  as  wide 
a  distribution  of  ownership  as  possible  and  to  have  as 
stockholders  those  who,  as  customers  or  employees, 
might  otherwise  be  in  a  position  to  work  injury. 
Finally,  the  extension  of  employee  ownership  is  thought 
by  many  to  be  one  of  the  best  methods  for  reducing 
the  prevailing  labor  unrest. 

Some  of  the  plans  of  employee  ownership  now  being 
devised  are  utterly  unsound  from  a  financial  point  of 
view.  To  the  extent  that  they  may  help  the  company 
to  raise  much  needed  funds,  they  may  jeopardize  the 
real  interests  of  the  employees.  On  the  other  hand,  to 
the  extent  that  the  employee's  financial  position  may 

165 


166         PROBLEMS  IN  BUSINESS  FINANCE 

be  carefully  protected,  he  may  feel  that  he  is  being 
treated  in  a  too  paternalistic  fashion.  Beyond  a  doubt 
there  are  many  difficulties  and  dangers  arising  from 
the  plans  now  being  tried  out.  Some  of  the  more 
important  considerations  are  indicated  by  the  problems 
which  follow.  Very  little  scientific  writing  has  been 
done  on  the  question. 

A.     CUSTOMER  OWNERSHIP 

Problem  48 

Financing  a  Large  Electric  Light  Company 

BY  Selling  Stock  to  Customers 

The  Commonwealth  Edison  Company  of  Chicago, 
having  12,000  shares  of  common  stock  to  sell,  recently 
(1920)  organized  teams  of  salesmen  (voluntarily) 
among  their  employees  outside  of  working  time.  They 
sold  the  entire  amount  in  three  days,  and  by  the  end  of 
the  week  had  sold  20,000  shares.  The  company  now 
has  14,000  stockholders,  mostly  customers. 

No  preferred  stock  has  been  issued,  but  the  bonds 
outstanding  are  about  equal  to  the  common  stock. 
The  company  probably  does  the  largest  electric  light- 
ing business  of  any  in  the  world. 

Questions 

1.  Does  this  indicate  a  strong  financial  position? 

2.  As  a  rule,  would  the  common  stock  of  a  public 
utility  company  be  a  sound  investment  for  the  small 
saver?    Why? 

3.  Does  the  size  or  type  of  public  utility  have  any- 
thing to  do  with  the  question?     Why? 

4.  As  an  investment  for  the  customer,  how  would 
the  common  stock  of  this  company  compare  with  that 
of  a  large  industrial  concern?  Of  a  small  industrial 
concern? 


CUSTOMER  OWNERSHIP  167 

Problem  49 

Financing  a  Small  Light  and  Power  Company  by 

Selling  Preferred  Stock  to  Customers 

A  small  public  utility  company  in  the  West  financed 
itself  largely  by  selling  preferred  stock  to  its  customers. 
As  time  went  on  the  company  was  absorbed  by  a  hold- 
ing company  in  New  York  City.  During  the  ''bad 
times"  of  1917-18  the  holding  company  decided  to 
defer  dividend  payments. 

Questions 

1.  Inasmuch  as  the  stock  had  been  sold  to  customers 
and  nearby  residents  as  an  investment  which  was  per- 
fectly safe  for  ''widows  and  orphans,"  do  you  consider 
that  this  was  a  proper  method  of  financing,  and  should 
the  dividends  have  been  deferred,  even  though  the 
treasury  of  the  company  was  exhausted? 

2.  Should  you  deem  it  advisable  for  an  industrial 
concern  to  finance  itself  in  the  same  way? 

3.  How  does  this  case  compare  with  the  preceding 
one? 


Problem  50 

Financing  the  Expansion  of  a  Small  Telephone 

Company  Solely  by  the  Sale  of  Common  Stock 

TO  THE  Users  of  the  Service 

A  small  telephone  system  was  installed  by  a  poor 
but  progressive  citizen  in  one  of  the  towns  of  North 
Dakota.    All  the  service  in  the  beginning  was  performed 


168  PROBLEMS  IN  BUSINESS  FINANCE 

by  the  owner  and  his  family.  As  calls  came  for  exten- 
sion of  service,  the  owner  refused  to  meet  the  demand 
unless  the  customers  would  buy  shares  of  common  stock 
in  the  business.  In  course  of  time  the  service  was 
gradually  extended  to  an  adjoining  municipality.  The 
customers  had  purchased  enough  common  stock  to 
enable  the  extension  to  be  made  without  incurring  any 
debt. 

Questions 

1.  Do  you  consider  this  a  satisfactory  method  of 
financing? 

2.  Would  it  have  been  a  sound  policy  for  a  small 
industrial  concern  to  follow? 

3.  How  does  this  case  compare  with  the  preceding 
one? 


Problem  51 
Financing  the  Expansion  of  a  Small  Power  Company 
BY  Means  of  Preferred  Stock  Issues  Sold  to 
Customers 

The Power    Company    was    originally    a 

small,  conservatively  managed,  electrical  generating 
company,  having  some  water  power  development  as 
well  as  a  small  steam  plant.  Some  years  ago  a  consoli- 
dation was  effected  with  other  properties  in  the  State 
and  the  ownership  which  had  before  been  largely  local 
began  to  be  widely  scattered. 

A  rather  extensive  construction  programme  was 
attempted  shortly  after  the  consolidation.  More  water 
power  was  secured,  additional  steam  plant  capacity 
was  provided,  and  a  heavy  investment  in  transmission 


CUSTOMER  OWNERSHIP  199 

lines  was  incurred  in  order  to  take  care  of  the  new 
business.  Owing  to  the  market  conditions  at  the  time, 
the  additional  capital  needed  for  this  programme  was  se- 
cured largely  by  the  issue  of  bonds,  which,  because  of 
the  excellent  reputation  of  the  concern  in  the  past,  car- 
ried a  very  low  rate  of  interest.  At  the  time  of  the 
consolidation,  some  additional  stock  had  been  issued, 
but  this  was  almost  solely  accounted  for  by  capitaliza- 
tion of  prospective  earnings. 

Due  to  the  unexpectedly  high  costs  during]the  follow- 
ing years,  and  the  refusal  of  the  Public  Utility  Commis- 
sion to  allow  a  corresponding  increase  in  rates,  the  com- 
pany for  some  time  has  been  unable  to  pay  dividends  on 
its  common  stock,  part  of  which,  as  previously  indicated, 
was  water.  Yet  in  order  to  hold  their  business,  and  to 
develop  the  new  business  which  seemed  essential  for 
the  future,  it  was  necessary  to  continue  a  moderate 
programme  of  new  construction. 

The  capital  needed  for  this  purpose  could  no  longer 
be  raised  bj^  bonds,  because  the  earnings  were  not  suf- 
ficiently high  to  allow  the  usual  margin  of  safety.  In 
fact,  it  was  about  all  the  company  could  safely  do  to 
meet  the  interest  on  its  heavy  bonded  indebtedness  and 
to  provide  adequate  reserves  of  different  sorts.  The 
company,  therefore,  managed  to  meet  its  capital  out- 
lays by  selling  preferred  stock  in  small  amounts  to 
people  in  the  territory  served  by  them. 

Recently  it  was  decided  that  the  earnings  could  be 
greatly  increased  by  further  expansions  which  called 
for  a  considerable  capital  expenditure.  In  order  to 
finance  these  extensions,  an  appreciable  amount  of 
additional  preferred  stock  was  again  sold  to  local 
purchasers  to  whom  the  issue  was  described  as  being 
particularly  attractive. 

Questions 

1.  Do  you  think  that  the  policy  of  financing  by 
means  of  preferred  stock  followed  by  this  company'' 
was  desirable — 

(a)  From  the   point  of   view  of    the   common 
stockholders? 


170         PROBLEMS  IN  BUSINESS  FINANCE 

(6)  From  the  point  of  view  of  the  bond  holders? 
(c)  From  the  point  of  view  of  the  customers 
and  others  who  purchased  the  preferred  stock? 


Problem  52 

The   Method    by    Which    the  United  Drug   Company 

Originally  Secured  the  Interest  of  Retail 

Druggists 

The  following  eulogy  appeared  in  the  Boston  News 
Bureau  in  February,  1921 : 

''New  England  should  be  proud  of  any  man  who 
by  sheer  energy,  business  ability,  and  enthusiasm, 
builds  within  the  Commonwealth,  over  the  short 
period  of  seventeen  years,  one  of  the  country's 
largest  corporations.  Not  only  that,  but  Louis  K. 
Liggett  manages  and  heads  the  biggest  drug  busi- 
ness in  the  world.  He  is  to  drugs  what  Duke 
was  to  tobacco,  what  Hill  was  to  railroads,  what 
Rockerfeller  was  to  oil. 

"Coming  to  Boston  when  a  young  man  with  only 
a  dream,  supported  by  the  qualifications  which 
have  made  America's  captains  of  industry,  he 
launched  into  a  field  which  had  not  been  con- 
quered." 

The  United  Drug  Company  was  first  organized  at 
the  end  of  1902.  Forty  friends  of  Mr.  Liggett  sub- 
scribed S4,000  each,  so  that  the  original  capital  was 
$160,000.  It  was  further  arranged  that  the  company 
would  manufacture  and  sell  drugs  only  to  those  stores 
which  were  preferred  stockholders  of  the  company. 
There  was  to  be  only  one  such   drug  store  in  each 


CUSTOMER  OWNERSHIP  171 

town.     Business  was  started  in  1903  with  one  hundred 
fifty  retail  druggists  as  local  stockholders. 

Questions 

1.  Specifically,  what  were  the  real  gains  from  this 
arrangement? 

2.  From  the  financial  point  of  view,  do  you  see  any 
drawbacks? 


Problem  53 
Extending  the  Customer  Ownership  in  the 
United  Drug  Company 

In  referring  to  plans  being  made  for  increasing  the 
sale  of  stock  among  the  retail  druggists  who  purchase 
from  the  United  Drug  Company  as  well  as  to  their 
clerks  and  customers,  President  Liggett  wrote  as  follows 
to  present  stockholders  on  March  18,  1921: 

I  think  the  most  valuable  idea  that  I  got  from  the  Boots 
Company  in  England  when  we  bought  it  was  the  fact  that 
they  had  40,000  Preferred  Stockholders,  and  that  those 
40,000  weie  customers  of  the  Boots  Stores,  who  bought  the 
stock  of  the  Boots  Company  over  the  counters  of  the  Boots 
Retail  Stores.  I  was  astounded  when  this  information  came 
to  light.  They  had  40,000  influential  citizens  throughout 
England  who  were  actively  boosting  the  Boots  business  as 
compared  with  our  having  8,000  Druggist  Stockholders  who 
are  boosting  our  business,  and  approximately  4,000  invest- 
ment stockholders  who  probably,  too,  are  boosting  our 
business. 

At  the  annual  meeting  of  our  Directors,  held  last  week, 
I  discussed  the  situation  with  them;  I  discussed  the  compari- 
son; I  told  them  of  my  plans  for  the  consolidation,  sometime 
later  this  year,  of  Liggett 's  International  and  United  Drug 
Company;  I  pointed  out  to  them  what  the  possibilities  of 
this  consolidation  were  going  to  bring  about  from  the  stand- 


172         PROBLEMS  IN  BUSINESS  FINANCE 

point  of  earnings,  etc.;  then  I  told  them  that  a  year  ago  the 
stockholders  had  voted  the  Board  of  Directors  the  right  to 
dispose  of  any  unissuetl  Common  stock  that  was  in  the 
Drug  Company's  Treasury,  and  1  said  to  them,  under  the 
circumstances — what  do  you  think  ought  to  be  done  with 
this  stock?  Should  it  he  offered  to  all  Connnon  stockholders 
pro  rata,  or  shoukl  it  be  offered  to  the  Rexall  Retail  Stock- 
holder Agents  of  the  Company,  or  should  it  be  sold  to 
bankers?  Their  decision  was  without  hesitancy  and  unani- 
mous that  in  view  of  the  points  that  had  been  made  there 
could  be  no  question  but  that  the  Rexall  Stockholders  should 
have  (and  as  they  expressed  it)  the  immediate  opportunity 
of  taking  this  stock,  not  only  for  themselves,  but  for  their 
clerks,  and  for  their  customers'  interests.  As  one  Director 
said, — "I  want  the  opportunity  of  selling  this  to  a  dozen 
friends  of  mine  because  of  the  influence  in  the  community; 
it  would  help  my  retail  business,  and  help  the  United  Drug 
Company."  Another  one  promptly  said, — "I  want  to  inter- 
est the  Doctors  in  my  town  in  this  stock  because  it  will  mate- 
rially break  down  the  antagonistic  feeling  on  the  part  of  the 
Doctors  toward  the  United  Drug  Company." 

As  a  result,  I  was  authorized  to  immediately  put  through 
the  necessary  formalities  so  that  the  Rexall  Agents  could 
have  the  first  opportunity  to  purchase  this  stock. 

You  know  we  live  by  experience.  I  remember  in  1914, 
right  after  the  war  broke  out,  that  I  offered  the  last  block 
of  stock  in  the  old  Company  to  our  stockholders,  and  it 
was  immediately  oversubscribed.  A  year  and  a  half  later 
every  man  who  bought  a  share  of  that  stock  received  three 
and  one-quarter  shares  in  exchange  for  the  one  share  he 
bought,  in  addition  to  his  regular  dividends.  In  other  words, 
if  he  had  sold  his  shares  for  par  he  would  have  taken  a  profit 
of  $225.  That  is  analogous  to  the  present  condition.  The 
United  Drug  Company  has  in  its  Treasury  $4,723,300  of 
Common  stock  over  and  above  what  it  must  hold  for  con- 
version purposes.  In  my  opinion  there  never  will  be  any 
more  of  this  Common  stock  issued.  Unless  something 
unforeseen  occurs  we  will  be  able  to  bring  about  consolida- 
tion during  this  year  of  all  of  our  interests  under  one  name 
with  this  one  corporation  stocks  issued  and  listed.  We  will 
have  concentrated  our  businesses — manufacturing,  wholesal- 
ing and  retailing  of  all  kinds  in  this  countr}^,  Canada  and 
England,  into  one  big  organization  representing  a  volume 
of  business  in  excess  of  $120,000,000  with  substantial  profits 
from  it,  and  with  every  indication  and  prospect  of  materially 
increasing  these  profits  over  what  we  have  shown  in  the  past. 

We  are  so  developed  in  our  manufacturing  business,  that 
we  can  take  care  of  the  next  five  years'  growth  without  new 


CUSTOMER  OWNERSHIP  173 

buildings  or  more  machinery,  with  a  possible  exception  of 
some  additions  to  warehouses  in  England. 

As  I  see  the  future,  the  more  we  develop  the  plan  of  having 
the  Retail  Druggist  Stockholder,  his  clerks,  and  his  cus- 
tomers, interested  as  investors  in  our  Company,  so  do  I  see 
a  pulling  power  that  will  make  for  volume  such  as  no  other 
plan  could  accomplish.  This  has  been  working  constantly 
in  my  mind  since  the  day  that  I  discovered  what  Boots  had 
done  toward  interesting  his  customers  in  his  business,  but 
not  until  recently  did  it  occur  to  me  that  we  had  a  way  of 
working  it  out  here.  When  our  consolidation  takes  place  I 
am  going  to  give  you  a  fixed  plan  for  accomplishing  this  in 
your  own  community.  Can  you  see  the  effect  of  having,  as 
Boots  has,  between  700  and  800  stockholders  surrounding 
each  one  of  his  stores?  What  I  am  suggesting  in  this  letter  is 
the  initial  step  to  make  a  foundation  among  a  few  prominent 
people  in  your  town,  who  will  materially  profit  by  the  con- 
solidation, and  their  interest  will  interest  many  more.  If 
we  are  to  make  a  profit  in  bringing  about  this  consolidation 
that  profits  should  as  far  as  possible  go  into  the  hands  of  those 
who  have  in  the  past,  and  are  now,  supporting  our  business 
by  their  efforts.     That  is  TRUE  COOPERATION ! 

The  United  Drug  Company  has  for  years  continuously 
paid  its  dividends.  As  an  industrial  it  has  a  record  that  is 
clean  and  wholesome.  It  at  present  pays  8%  per  annum. 
Its  development  in  volume  has  probably  been  second  to 
none.  Its  stock  within  the  last  two  years  has  sold  in  the 
market  as  high  as  $150  per  share  in  substantial  amounts, 
even  when  it  was  paying  less  dividends  than  it  is  paying 
now.  Its  Common  stock  sold  in  the  market  today  at  $95. 
I  have  been  buying  it  constantly  at  from  $145  a  share  down, 
and  I  know  that  every  officer  in  the  Company  and  the 
employees  have  been  doing  the  same  thing.  If  you  stock- 
holders collectively  went  into  the  market  in  the  next  month 
to  buy  even  a  million  dollars'  worth  of  our  stock,  let  alone 
$4,700,000,  you  would  probably  force  the  market  up  to 
$125  or  more  per  share. 

The  company  itself  cannot  sell  its  stock  for  less  than  100. 
If  we  were  to  employ  the  bankers  to  sell  it  for  us  we  should 
have  to  pay  them  a  five  per  cent  commission  on  the  par 
value  to  do  it.  What  I  am  proposing  to  do  is  that  you  and 
other  retail  agents  should  act  as  our  agents  in  the  sale  of 
this  stock,  in  place  of  the  bankers,  and  we  will  pay  you  a 
cash  commission  for  your  services  of  $5  per  share  on  each 
share  of  stock  for  which  you  obtain  a  subscription.  In  this 
way,  at  the  same  expense,  our  stock  will  be  placed  with  our 
retail  druggists,  their  clerks  and  friends,  rather  than  with 
investors. 


174         PROBLEMS  IN  BUSINESS  FINANCE 

The  torirs  of  rcniittance  will  be  25%  on  the  first  of  April 
of  whatever  amount  you  subscribe  to;  15%  on  the  first  of 
May,  and  15%  on  the  first  of  each  month  thereafter  until 
the  stock  is  paid  for. 

I  want  to  close  this  letter  l)y  saying;  that  1  was  never  more 
confident  of  the  future  of  this  business  than  I  am  ri^ht  now. 
No  industrial  organization  in  this  country  will  l)e  able  to 
compare  with  our  growth  in  the  next  five  j^ears  when  our 
full  cooperative  plans  are  developed. 

Believing  as  I  do  that  this  opportunity  will  never  come 
again,  I  strongly  recommend  that  you  take  advantage  of 
it,  and  am  glad  that  you,  your  clerks  and  friends  are  having 
this  chance. 

Under  date  of  April  6,  1921  Mr.  Liggett  again  wrote 
as  follows,  after  the  stock  selling  campaign  was  started : 

I  am  not  thinking  so  much  about  the  monej^  brought  in 
directly  to  the  Company — that  is  not  it — I  am  thinking 
about  the  increased  business  of  The  Rexall  Stores  when 
these  new  stockholders  commence  to  wield  their  influence 
in  their  communities.  I  wish  it  were  possible  for  me  to 
describe  what  I  believe  their  participation  in  this  last  offer 
of  the  LTnited  Drug  Company  Common  stock  will  mean  to 
them  before  another  year  has  passed,  and  also  what  it  will 
mean  to  The  Rexall  Stores  in  those  towns  from  which  sub- 
scriptions come.  I  know  also,  that  the  new  stockholders 
who  come  in  now  will  get  the  full  benefit  from  the  plans  we 
are  perfecting  and  will  therefore  be  better  boosters  for  your 
business  ancl  the  Rexall  products  that  you  control.  If 
every  Rexall  Agent  sent  in  as  long  a  list  of  subscriptions  as 
some  have  sent  in,  it  would  be  impossible  to  fill  one-tenth 
of  them  from  the  limited  number  of  shares  in  this  allotment. 
What  I  specially  want  to  impress  upon  you  is,  that  the  stock- 
holders you  now  get  among  your  friends  should  be  the 
representative  people  in  your  communities — people  who  can 
do  you  and  your  business  the  most  good.  These  will  be 
essential  to  the  foundation  of  the  ideal  condition  I  have  in 
mind.  I  do  not  want  a  single  town  in  the  United  States 
where  there  is  a  Rexall  Store  to  be  without  that  foundation 
which  is  required  for  a  tremendous  publicity  campaign  for 
you  personally  and  your  stores. 

I  have  pressed  for  eighteen  years  a  policy  which  I  believe 
to  be  right— COOPERATION— and  nothing  ever  had 
better  support  than  this  policy  has  had  from  the  present 
10,000  Rexall  Agents.  We  have  gone  far  with  it,  but  not 
far  enough.  True  and  thorough  cooperation  in  business 
means  the  manufacture,  distribution  and  consumption  of 


CUSTOMER  OWNERSHIP  175 

trade-marked  articles  with  a  unified  interest,  and  this  we 
propose  to  pursue  until  it  becomes  a  reality,  with  you  con- 
trolling the  situation  in  your  own  town.  I  have  always 
believed  in  this  policy.  When  I  observed  what  the  Boots 
Company  had  accomplished  by  actual  practice  in  England, 
as  stated  in  my  previous  letter,  I  made  up  my  mind  that  the 
moment  had  come  to  bind  these  businesses  together  for  the 
stockholders  who  stand  as  the  exponents  of  this  broad 
policy,  and  who  will  reap  the  benefits  arising  from  it. 

I  am  told  that  my  recent  letter  to  you  on  this  policy  got 
into  Wall  Street  last  Thursday.  Evidently  some  of  the 
professional  traders  did  not  relish  the  idea  that  the  United 
Drug  Company  stock  is  tightly  held  by  those  interested  in 
the  business,  nor  did  it  seem  to  like  the  p!an  to  place  more 
of  it  in  the  hands  of  the  Rexall  Agents,  their  friends  and 
customers,  and  thereby  lessen  the  opportunity  of  these 
professional  bear  traders  to  manipulate  the  market  for  their 
own  benefit.  They  consequently  attempted  a  so-called 
"bear  raid"  and  started  to  sell  the  stock  "short."  They 
offered  it  in  large  blocks  and  hammered  the  price  down  to 
$85  per  share.  Many  of  them  contracted  to  sell  what  they 
did  not  have  to  deliver,  expecting  to  buy  the  stock  cheaper 
than  they  sold  it,  but  when  they  started  to  buy  for  delivery 
they  ran  the  price  back  very  quickly  to  $90  and  then  to 
$95  the  next  day.  I  am  told  that  some  of  them  are  still 
short  and  must  cover  some  time  at  some  price. 

They  find  it  dangerous  to  sell  United  Drug  Common 
"short" — the  floating  supply  is  small — people  buy  our  stock 
to  keep  it  because  they  know  what  we  have  done  in  the  past, 
and  they  have  confidence  in  the  future.  I  have  never 
believed  anything  with  a  stronger  conviction  in  my  life  than 
that  United  Drug  will  repeat  its  past  performances  both  in 
growth  and  earnings  and  will  far  excel  anything  we  have 
yet  accompUshed. 

It  doesn't  matter  whether  you  buy  the  stock  in  the  market 
or  from  the  Company- — do  whichever  you  want;  but  this  I 
do  know — that  the  offer  I  made  saved  money,  because  if  I 
had  taken  all  the  subscriptions  that  we  have  received  here 
and  bought  the  stock  in  the  market  to  fill  them,  the  stock 
would  have  cost  nearer  $125  and  I  probably  would  not  have 
been  able  to  fill  the  subscriptions  at  that  price. 

In  conclusion,  let  me  say  that  the  United  Drug  Company's 
business  with  its  stockholders  was  nearly  as  large  in  March 
as  it  was  in  January  and  February  combined — I  was  never 
more  confident  of  our  business  for  this  year.  I  cannot 
account  for  our  showing  in  any  other  way  than  that  The 
Rexall    Stores   are   seeing  the   wisdom   of   enlarging   their 


176         PROBLEMS  IN  BUSINESS  FINANCE 

purchases  from  their  own  Company  on  their  own  controlled 
goods.  Now  you  are  reaping  the  benefits  of  the  exclusive 
agency  on  merchandise  which  is  not  subject  to  the  smashing 
prices  by  Tom,  Dick  and  Harry.  We  don't  make  a  product 
that  is  not  of  good  value  for  the  money  the  customer  pays, 
and  your  profits  are  protected. 

Liggett's  Retail  Stores  are  ahead  in  March  over  the  same 
month  of  last  year.  Indeed,  I  can  now  see  many  indications 
of  a  big  year  ahead  of  us  with  conditions  improving  everv 
day! 

On  June  6,  1921,  a  notice  appeared  in  the  financial 
papers  to  the  effect  that  the  United  Drug  Company 
was  putting  out  an  issue  of  $15,000,000  twenty-year, 
convertible  bonds  at  8  per  cent  interest.  The  purpose 
of  the  new  issue  was  stated  to  be  the  payment  of  short 
time  notes  coming  due  on  June  15th  and  the  reduction 
of  outstanding  bank  loans. 

The  indenture  under  which  the  bonds  was  issued 
provided  as  follows: 

(1)  So  long  as  any  bonds  of  this  issue  are  outstanding, 
none  of  the  United  Drug  Company  or  of  its  subsidiaries 
(other  than  the  real  estate  now  mortgaged  as  above  stated) 
shall  be  mortgaged  or  pledged  unless  the  present  issue  of 
bonds  are  equally  secured  with  the  other  obligations  covered 
by  such  mortgage  or  pledge;  provided  that  the  company  and 
its  subsidiaries  shall  have  the  right  to  purchase  additional 
property,  subject  to  existing  mortgages,  or  may  mortgage 
or  pledge  any  property  heretofore  acquired,  other  than  its 
quick  assets. 

(2)  The  Company  agrees  that  the  ratio  of  quick  assets  to 
quick  liabilities,  as  described  in  the  indenture  (and  including 
the  present  issue  of  bonds  and  the  53^2  year  notes)  of  the 
Company  and  its  subsidiaries,  shall  be  maintained  at  at  least 
125  per  cent.  In  case  such  ratio  is  not  maintained,  no  divi- 
dend shall  be  paid  on  the  Ccmmon  stock  of  the  Company 
until  it  is  restored. 

Since  this  date  there  has  been  talk  of  additional 
financing. 

Questions 
1.  Analyze  critically  the  claims  made  by  the  United 
Drug  Company. 


CUSTOMER  OWNERSHIP  177 

2.  Do  you  think  it  was  wise  at  the  time  indicated 
for  the  company  to  attempt  to  sell  more  stock  to 
customers  and  employees? 

3.  Do  you  think  the  same  arguments  for  customer 
or  distributor  ownership  in  the  United  Drug  Company 
which  appUed  at  its  beginning,  apply  to  the  present 
situation? 

4.  What  is  your  opinion  of  the  stock  seUing  methods 
used? 

5.  How  do  you  expect  that  the  future  financial 
experience  of  the  company  will  affect  those  customers 
who  have  recently  increased  their  holdings? 


Problem  54 
Giving  Preferred  Stock  as  a  Bonus  to  the  Customer 

"Two  men  in  New  York  City,  possessing  an  extensive 
knowledge  of  selling  and  a  new  process  for  producing 
after-dinner  confections,  determined  to  finance  a  new 
$50,000  company  on  their  customers'  capital.  Very 
little  equipment  was  needed,  as  the  product  consisted 
of  an  assortment  of  attractive  five  cent  packages,  made 
in  one  shape  and  from  one  substance,  but  possessing 
different  flavors  and  labels.  The  selling  expense,  how- 
ever, would  normally  be  very  high,  and  particularly 
the  cost  of  introducing  the  brand. 

"With  a  few  hundred  dollars,  these  men  first  con- 
tracted for  a  small  quantity  of  their  product  from  a 
reputable  manufacturer,  who  supplied  the  product, 
labels,  cartons  and  all,  at  a  stated  contract  price. 
Then  a  small,  but  attractive  prospectus  was  issued  in 
pamphlet  form,  describing  in  glowing  terms  the  advan- 
tages of  the  product  and  the  splendid  business  which 


178  PROBLEMS  IN  BUSINESS  FINANCE 

the  new  company  would  doubtless  develop.  The 
authorized  capitalization  was  $500,000,  although  the 
promoters  only  expected  to  raise  $50,000  in  cash. 

"With  the  samples  and  prospectus  in  hand,  the  two 
men  individually  canvassed  a  portion  of  the  retail 
trade  in  New  York  City.  Their  proposition  to  the 
retailer  was  that  he  should  place  with  them  a  contract 
for  the  confection  equal  to  his  full  annual  requirements, 
at  the  usual  prices  prevailing  for  similar  confections, 
which  were  clearly  no  better  than  the  new  product. 
As  a  consideration  for  doing  so  and  for  ordering  by 
mail  as  required,  thus  avoiding  the  expense  to  the  seller 
of  frequent  sales  calls,  the  retailer  was  to  get  a  full- 
paid  certificate  of  eight  per  cent  preferred  stock,  to 
the  par  value  of  one  dollar,  with  each  ten-dollar  carton 
of  goods  ordered,  in  addition  to  the  usual  quantity 
discount  on  larger  orders.  The  preferred  stock  was 
to  be  delivered  on  payment  of  the  invoice.  All  orders 
were  taken  for  future  delivery,  with  the  exception  of 
the  first  ten-dollar  carton,  w^hich  was  delivered  then 
and  there  upon  an  order  calling  for  payment  within 
ten  days. 

"It  will  be  noted  that  under  this  plan  the  retailer 
was  paying  no  more  than  usual  for  his  goods,  but  was 
receiving  in  addition  a  ten  per  cent  bonus  in  preferred 
stock.  This  made  him  a  stockholder  in  the  new  com- 
pany and  presumably  a  regular  customer.  On  the 
other  hand,  the  new  company  was  giving  away  nothing, 
since  the  preferred  stock  delivered  to  retailers  repre- 
sented merely  the  amount  which  would  otherwise 
have  been  paid  to  retail  salesmen,  or  advertisers,  to 
market  the  product.  The  usual  profit  would  accrue 
to  the  company  from  the  manufacture  and  sale  of  the 
goods.  The  plan  was  based  upon  a  clever  device  to 
reduce  the  expense  of  selling  repeat  orders,  the  saving 
being  refunded  to  the  purchaser  in  capital  stock  to 
insure  his  continued  support.  The  issue  of  stock  under 
these  circumstances  was  equivalent  to  selling  it  for 
cash  and  then  using  the  capital  to  advertise  and  sell 
the  product  of  the  company. 


CUSTOMER  OWNERSHIP  179 

"All  stock  was  originally  issued  to  the  two  promoters 
in  exchange  for  the  full  right  to  the  process,  names, 
designs,  etc.,  under  which  the  product  would  be  pro- 
duced. The  $150,000  preferred  stock  would  finance 
sales  up  to  $1,500,000,  on  which  the  normal  gross 
profits  to  the  company  were  expected  to  be  $300,000. 
Out  of  this  profit  were  to  be  paid  dividends  on  the 
preferred,  the  cost  of  selling  introductory  orders,  and 
administration  expenses.  It  was  calculated  that 
$100,000  would  remain,  half  for  dividends  on  common, 
and  half  as  cash  capital  donated  by  the  common  stock- 
holders to  finance  the  business.  By  the  time  the 
preferred  stock  would  become  exhausted  the  business 
would  be  established  on  a  profitable  basis,  they  cal- 
culated, leaving  the  company  free  to  increase  the 
capitalization  or  change  the  form  of  their  selling 
contracts,  which  expired  annually." 

(Quoted  from  Walker,  Corporation  Finance,  297-299.) 

Question 
What  is  your  opinion  regarding  the  soundness  of 
this  scheme  and  its  possibilities? 


Problem  5o 
A  Novel  Method  of  Selling  Stock  to  the  Customer 

On  May  20,  1921,  the  following  note  appeared  in 
the  Boston  Herald  regarding  the  stock  selling  campaign 
of  a  small  company  recently  formed  to  operate  a 
chain  of  gasoline  filling  stations: 

"Giving  away  common  stock  as  a  bonus  is 
nothing  new.  It  has  been  done  by  many  indus- 
trial  concerns.     A   local   brokerage   house   which 


180  PROBLEMS  IN  BUSINESS  FINANCE 

is  selling  stock  in  a  gasoline  filling  station  propo- 
sition goes  this  one  better  by  making  the  follow- 
ing offer  for  $50:  Four  shares  of  8%  preferred, 
par  $10,  three  shares  of  common,  par  $5,  and  5 
gallons  of  'Socony  Gasoline.' 

'*0f  course,  throwing  in  plenty  of  gas  is  no  inno- 
vation in  the  stock  selling  game.  This  article  is  a 
part  of  the  stock-in-trade  of  many  security  sales- 
men." 

Two  or  three  days  later  there  appeared  on  the  finan- 
cial page  of  the  same  paper  a  good  sized  "ad"  in  which 
the  above  note  was  reproduced  in  a  rather  striking 
form  and  backed  up  by  the  following  suggestions: 

"Boston  &  Maine  Railroad  for  generations  gave 
to  its  stockholders  free  rides. 

"It  is  common  practise  for  companies  to  seek  to 
interest  the  stockholders  in  their  properties. 

"The  above  company  wants  its  stockholders  to 
patronize  the  stations  it  owns  at  the  following 
locations:  (Four  different  stations  are  here  men- 
tioned.) It  is  a  satisfaction  when  buying  Socony 
Gas  at  the  lowest  prices  quoted  to  be  at  the  same 
time  earning  dividends  on  your  own  stock." 

Question 
Do  you  think  that  this  company  should  have  diffi- 
culty in  financing  itself? 


Problem  56 
Getting  new  Capital  for  an  Automobile  Concern 
BY  Selling  Stock  to  Customers  in  1920 

"An  automobile  manufacturing  company  has  hit 
upon  a  unique  method  of  increasing  its  working  capital, 
while  at  the  same  time  providing  for  an  increase  in 
the  sales  of  its  automobiles.     It  has  been  decided  to 


CUSTOMER  OWNERSHIP  181 

sell  2,000  of  what  are  termed  'Ownerships  of  Motors/ 
these  being  apportioned  among  the  various  states  on 
what  appears  to  be  a  population  basis. 

"To  become  one  of  the  so-called  owners  one  has  to 
subscribe  for  twenty-five  shares  of  8  per  cent  partici- 
pating preferred  stock,  which,  participates  in  earnings 
after  dividends  on  the  preferred  and  after  6  per  cent 
has  been  paid  on  the  common.  This  stock  may  be 
purchased  at  $5  a  share,  and  ownership  entitles  the 
holder  to  subscribe  to  seventy-five  additional  shares 
of  preferred  stock  at  the  par  of  $5  a  share  at  such 
times  as  the  Board  of  Directors  may  declare  the  books 
of  the  corporation  open  for  further  subscription. 

"The  bearing  of  the  ownerships  to  the  sale  of  cars  is 
bound  up  in  a  clause  in  the  circular  which  states  that 
the  holder  of  a  membership  is  entitled  to  purchase  one 
car  manufactured  by  the  corporation  at  a  discount  of 
20  per  cent  from  the  list  price  at  any  time  within  two 
years  from  the  date  of  subscription,  provided  that  at 
such  time  he  shall  have  signified  his  intention  to  take 
up  complete  ownership  by  subscribing  to  seventy-five 
additional  shares.  The  subscription  to  the  first  twenty- 
five  shares  is  payable,  should  it  be  so  desired,  in  four 
instalments,  making  S125  in  all,  but  there  is  a  discount 
of  2  per  cent  to  be  had  for  cash  so  that  the  subscription 
in  this  case  would  cost  $122.50. 

"In  letters  to  prospective  'Owners  of  Motors'  some 
glowing  details  are  set  forth  of  the  earnings  which  auto- 
mobile companies  are  enjoying,  but  there  is  no  specific 
mention  of  what  these  companies'  earnings  amount  to 
with  relation  to  outstanding  stock.  The  situation  is, 
however,  summed  up  in  these  words:  '  In  acquiring  an 
ownership  in  the  corporation  now  you  are  putting  your- 
self in  line  to  share  in  profits  of  this  money  making 
industry  by  an  investment  which  is  safe,  moderate  in 
amount  and  very  easy  to  make.'  From  'safe'  to 
the  end  of  the  sentence  the  words  are  underlined  to 
give  added  force  to  the  statement.  With  the  addi- 
tional capital  to  be  supplied  by  the  2,000  new  owners 
for  the   immediate   expansion   of   its   business,   it   is 


182  PROBLEMS  IN  BUSINESS  FINANCE 

asserted  there  is  an  opportunity   for   profit   that   is 
unmatched  today." 

{New  York  Times,.Oci.  23,  1920.) 

Questions 

1.  What  do  you  think  of  this  method  of  getting  new 
capital,  and  the  arguments  used? 

2.  From  the  point  of  \dew  of  an  industrial  company, 
is  it  wise  for  customers  in  general  to  buy  stock  as  a 
speculation?     Why? 


Problem  57 

A  Drive  for  Customer  Ownership  iN 

A  Chain  of  Lunch  Rooms 

On  January  25  and  26,  1921,  half -page  adver- 
tisements appeared  in  the  Boston  Herald,  inserted  by 
the  president  of  the  Waldorf  Lunch  System.  In  sum- 
mary, the  material  appearing  in  these  advertisements 
was  as  follows: 

Waldorf 

How  Less  Than  2  cents  Profit  Per  Meal 

Built  an  $11,000,000  a  Year  Business. 

A  Real  Opportunity  for  the  Small  Investor. 
Why  I  Want  Waldorf  Customers  to  Share 
in  Our  Proceeds 

There  is  a  great  human  story,  a  business  romance, 
in  how  one  poor  man  with  his  hard  earned  savings  and 
borrowings  from  friends  started  with  only  $1,800  and 
lived  to  see  the  idea  grow  into  the  largest  chain  of  lunch 
rooms  in  the  country,  with  restaurants  in  twenty-eight 
diff"erent  cities  and  assets  of  over  $5,000,000 — Waldorf 
System,  Inc. 

The  Waldorf  System  had  its  inception  in  the  found- 
ing of  the  first  Waldorf  Lunch  at  Springfield,  Massachu- 
setts in  1904,  with  an  initial  investment  of  only  $1,800. 

No  such  remarkable  success  would  have  been  possible 
had  there  been  behind  the  project  only  the  thought  of 
profit.  The  foundation  idea  of  the  Waldorf  System, 
Inc.,  was  to  establish  lunch  rooms  of  real  public  service 


CUSTOMER  OWNERSHIP  183 

in  providing  the  people  at  large  with  food  of  unquestion- 
able quality,  correctly  and  uniformly  prepared  in  abso- 
lutely clean,  sanitary  kitchens,  at  such  a  price  as  to  place 
it  within  the  reach  of  every  man,  and  woman,  at  a  profit 
of  a  few  cents  a  meal. 

In  the  desire  to  increase  valuable  good-will  and  to 
establish  closer  i-elations  with  those  it  serves,  Waldorf 
System,  Inc.,  cordially  invites  every  one  of  its  patrons 
to  become  part  owners  in  this  great  business  by  be- 
coming owners  of  a  small  amount  of  its  common  stock, 
and  thus  share  in  the  profits  which  their  patronage  helps 
to  create.  Waldorf  System,  Inc.,  has  no  common  stock 
to  sell  and  therefore,  obviously,  would  not  profit  or  re- 
ceive one  cent  from  such  a  purchase.  The  stock  may 
be  purchased — like  any  other  stock — in  the  open  market. 

1  his  company  would  benefit  indirectly  in  turning  its 
customers  into  partners,  so  to  speak,  with  all  the 
natural  increase  in  interest  which  ownership  inspires 
in  a  customer  of  a  business.  This  company,  therefore, 
desires  to  have  its  common  stock  owned  by  thousands 
of  its  customers  in  small  amounts  rather  than  owned  by 
several  hundreds  in  larger  amounts,  as  at  present.  This 
sound  business  pohcy  has  been  advocated  for  years  by 
the  larger  public  utility  companies  which,  like  the 
Waldorf  System,  deal  directly  with  thousands  of  people. 
Further  encouragement  is  given  by  such  companies  to 
have  its  stock  owned  in  small  amounts  by  a  large 
number  of  its  customers.  A  representative  example 
is  the  American  Telephone  &  Telegraph  Compan3^ 
whose  stock  is  owned  by  138,000  different  stockholders.* 
America's  greatest  corporation,  the  United  States 
Steel  Corporation,  is  another  conspicuous  example,  as 
the  profits  of  that  great  enterprise  are  shared  by  nearlv 
100,000  people. 

We  have  chosen  this  particular  time  to  make  this 
announcement,  as  this  period  offers  the  most  striking 
evidence  of  the  desirability  of  an  investment  in  the 
common  stock  of  the  Waldorf  System.  Compare  the 
steady  growth  and  prosperity  of  the  Waldorf  System, 
Inc.,  right  through  the  period  of  businessd  epression, 
which  in  a  large  number  of  cases  has  entirely  cut  off  the 
dividends  of  some  of  America's  best  known  and  here- 
tofore most  successful  corporations.  The  fundamental 
reason  for  Waldorf  prosperity  is  apparent — people  must 
eat,  however  they  may  restrict  other  purchases. 

The  best  and  safest  investment  will  have  both  stability 
and  steadiness  of  earning  power.  The  present  business 
*Stated  to  be  about  200,000  by  the  end  of  August,  1921. 


184         PROBLEMS  IN  BUSINESS  FINANCE 

period  has  strikingly  shown  that  an  investment  may  be 
both  safe  and  be  in  a  stable  business,  yet  not  possess  a 
steady  earning  power.  It  profits  the  investor  little  to 
have  his  money  in  a  stable  business  if  it  does  not  earn 
money  for  him  steadily.  Compare  the  record  of  the 
thousands  of  investments  (whose  earnings  are  entirely 
cut  off)  to  the  record  of  earnings  of  the  Waldorf  System, 
Inc.,  during  the  same  period  of  business  depression. 

There  are  hundreds  of  people  eating  daily  at  the 
Waldorf  Limches  who  every  three  months  are  paid  back 
by  the  Waldorf  the  money  they  spent  in  the  meantime 
for  their  lunches.  They  have  found  one  of  the  most 
profitable  methods  of  reducing  the  cost  of  living. 

They  are  the  men  and  women  who  have  put  their 
savings  in  the  common  stock  of  the  Waldorf  Systeiii, 
Inc.,  and  own  enough  shares  so  that  the  dividends  they 
have  received  pay  for  their  lunches  the  year  round. 

I  am  taking  this  method  of  talking  to  our  thousands 
of  patrons,  as  a  great  many  of  them  are  not  investors, 
or  are  not  in  touch  with  investment  houses  and  are 
therefore  not  likely  to  know  what  an  unusually  safe  and 
profitable  investment  the  common  stock  of  the  Waldorf 
System,  Inc.,  is. 

The  net  earnings  for  1919  were  at  the  rate  of  $385,467 
a  year.  Although  the  increased  costs  of  provisions 
reduced  the  company's  proceeds  per  meal  during  1920, 
the  new  restaurants  acquired  (30)  and  the  large  in- 
crease in  the  volume  of  business,  with  careful,  efficient 
management,  enabled  the  company  to  show  net  earnings 
at  the  rate  of  $626,703  for  1920.  (There  are  now  89 
restaurants  in  the  chain.) 

In  1919  dividends  on  the  common  stock  were  at  the 
rate  of  10%  per  year,  cash  dividends.  In  the  year  just 
closed,  1920,  there  were  a  cash  dividend  of  10%  and 
two  stock  dividends  of  5%  each.  Based  on  the  present 
outlook,  I  can  see  no  reason  why  future  earnings  should 
not  equal  or  exceed  past  earnings. 

Neither  this  company  nor  its  officers  have  any  com- 
mon stock  to  sell.  It  may  be  purchased  like  any  other 
stock  in  the  open  market,  through  any  stock  exchange 
member.  The  market  price  is  shown  daily  on  the 
Boston  Gtock  Exchange. 

If  you  have  no  broker  connection,  or  if  you  are  not 
familiar  with  investment  matters,  I  shall  be  glad  to  ad- 
vise you  of  the  name  of  some  responsible  investment 
house  through  which  you  can  buy  Waldorf  common 
stock.  I  shall  welcome  you  as  a  part  owner  of  this  busi- 
ness, no  matter  how  few  shares  you  can  buy.    And  you'll 


EMPLOYEE  OWNERSHIP  185 

have  the  satisfaction  of  having  your  money  invested 
in  a  business  that  has  proved  safe. 

Questions 

1.  What  seems  to  you  to  be  the  real  purpose  of  this 
advertising? 

2.  Analyze  the  apparent  strength  or  weakness  of  the 
Waldorf  Company  at  present? 

3.  Do  you  agree  with  the  arguments  presented  by 
the  president  of  the  company? 

4.  Is  "customer  ownership"  of  a  restaurant  of  any 
real  advantage? 


B.    EMPLOYEE  OWNERSHIP* 

Problem  58 
Some  Typical  Methods  of  Promoting 
Employee  Ownership 

The  following  instances  of  selling  stock  to  employees, 
many  of  which  have  been  publicly  noticed,  show  the 
recent  tendencies  toward  employee  ownership.  These 
cases  have  been  selected  at  random  for  purposes  of 
discussion. 

A.  The  United  States  Steel  Corporation 
The  United  States  Steel  Corporation  announced  yester- 
day that  the  annual  stock  offering  to  employees  would 
be  made  this  year  at  $81  a  share,  the  lowest  price  at  which 
the  shares  have  been  put  out  since  1914,  when  the  offering 
price  was  at  S57  a  share.     The  highest  price  was  in  1917, 

*There  are  really  no  worth-while  references  on  this  topic.  Some 
help  may  be  gained  on  one  aspect  of  this  subject  by  consulting  "Profit 
Sharing;  Its  Principles  and  Practice"  by  Burritt,  Dennison,  Gay,  et  at., 
pp.  199-234.     See  also  suggestions  on  page  197,  infra. 


186  PROBLEMS  IN  BUSINESS  FINANCE 

when  the  subscription  was  available  at  $107  a  share,  and 
last  year  the  offering  was  made  at  S106.  The  number  of 
shares  taken  in  1920  was  the  largest  on  record,  totaling 
167,407,  and  the  subscriptions  of  1919  totaled  156,680  shares, 
when  the  100,000  mark  was  crossed  for  the  first  time  in  the 
history  of  the  corporation.  It  is  expected  that  the  present 
subscription  will  take  at  least  175,000  shares  and  possibly 
cross  the  200,000  point,  since  the  price  is  low  as  compared 
with  recent  years. 

An  employee  of  the  corporation  who  subscribed  for  every 
ofTering  of  common  stock  and  who  took  his  subscription  this 
year  would  find  that  the  average  price  of  his  shares  was 
slightly  in  excess  of  $79.  It  was  the  custom  of  the  Steel 
Corporation  in  its  earlier  years  to  offer  employees  the  right 
to  subscribe  to  preferred  stock,  but  no  allotment  of  preferred 
was  made  available  after  1914.  The  lowest  price  at  which 
the  common  stock  has  ever  been  offered  was  in  1909,  when 
the  figure  was  $50  a  share. 

So  far  as  the  offering  this  year  is  concerned,  it  conforms  in 
every  way  with  the  offerings  of  the  past,  except  as  to  price. 
The  emploj^ees  have  the  privilege  of  subscribing  to  stock  in 
proportion  to  their  salary,  those  receiving  $795  or  less  being 
entitled  to  take  one  share,  and  those  with  a  salary  between 
$19,000  and  $32,000  being  entitled  to  fifteen  shares.  Pay- 
ment for  the  stock  may  be  made  monthly  over  a  period  of 
three  years.  There  is  a  $5  a  year  bonus  for  a  period  of  five 
years  that  goes  with  each  share  of  stock  held  continuously 
by  a  subscriber  for  that  time.  This  cuts  down  the  actual 
outlay  of  cash  by  the  subscriber  by  $25."     (January  1C21.) 

B.     The  General  Electric  Company 

A  special  meeting  of  the  stockholders  of  the  General 
Electric  Compan}^  has  been  called  for  the  purpose  of  voting 
upon  a  proposition  to  authorize  the  sale  of  shares  in  the 
company  to  emploj^ees.  C.  A.  Coffin,  chairman  of  the  board 
of  the  company,  in  sending  out  the  call  for  the  special  meet- 
ing, says  that  it  has  long  been  the  view  of  the  directors  that 
ownership  of  stock  by  employees  is  greatly  to  be  desired, 
both  as  a  means  of  investing  their  savings  and  of  creating 
a  direct  and  personal  interest  in  the  company's  welfare. 
The  amount  of  stock  it  is  proposed  to  sell  the  employees  is 
not  to  exceed  50,000  shares. 

In  the  letter  accompanying  the  call  for  the  special 
meeting  Mr.  Coffin  says,  in  part: 

Acquisition  of  such  stock  by  emploj^ees  in  a  large  way  is 
not  practicable  except  through  some  plan  permitting  the 


EMPLOYEE  OWNERSHIP  187 

purchase  upon  instalment  payments.  Until  recently  it  has 
not  been  possible  for  your  company  to  adopt  such  a  plan  for 
the  reason  that  stock  was  not  available  for  this  purpose. 
But  under  the  New  York  Stock  Corporation  law  as  amended 
in  1919,  a  corporation  now  may,  with  the  consent  of  its 
stockholders,  sell  stock  to  its  employees. 

It  is  under  the  provisions  of  this  statute  that  you  are  now 
asked  to  vote  authority  to  the  Directors  to  sell  not  more 
than  50,000  shares  of  the  authorized  and  unissued  capital 
stock  to  the  company  to  its  employees. 

It  is  proposed  that  the  subscription  price  shall  be  sub- 
stantially the  market  price  at  the  time  the  offer  is  made, 
pa^^ment  for  the  shares  to  be  made  by  periodical  deductions 
from  the  paja'oll.  In  order  that  all  complexity  and  detail 
shall  as  far  as  possible  be  avoided,  there  will  be  no  allowance 
or  adjustment  for  interest  either  on  payments  made  or  on 
unpaid  balances;  but  upon  completion  of  the  subscription 
payments  the  company  will  give  a  credit  to  the  employee 
which  shall  represent  approximately  the  net  return  had  he 
been  an  actual  holder  of  the  stock  and  had  received  the 
dividends  thereon  from  the  date  of  his  subscription. 

It  is  proposed  that  an  employee  whose  subscription  is 
canceled  because  of  illness,  unemployment  or  other  reason 
may  receive  back  the  money  deducted  from  his  pay  with 
interest  at  the  rate  of  6  per  cent  per  annum. 

Certificates  of  stock  will  not  be  delivered  until  completion 
of  subscription  payments.  (January,  1921.) 

C.     The  Eastvian  Kodak  Company 

The  adoption  of  plans  under  which  employees  are 
given  a  chance  to  purchase  stock  is  now  being  contemplated 
by  a  number  of  large-  and  medium  sized  concerns  in  all 
parts  of  the  country.  These  will  be  interested  in  one  of  the 
most  successful  employee  stock  subscription  plans  which  has 
come  to  notice,  that  of  the  Eastman  Kodak  Company, 
Rochester,  N.  Y.  In  July,  1919,  it  is  stated,  this  company 
extended  to  the  wage  earning  and  salaried  employes  in  the 
service  of  the  company,  or  in  any  of  its  allied  companies, 
at  the  time  the  application  for  shares  was  made,  the  privilege 
of  buying  a  prescribed  number  of  shares  of  stock  at  par. 
Of  the  amount  set  aside  for  distribution,  Mr.  Eastman 
donated  10,000  shares  of  common  stock,  par  value  $1,000,000. 
and  the  company  set  aside  the  same  number  of  shares  of  like 
value.  At  the  time  this  stock  was  set  aside  the  company's 
stock  was  quoted  at  600.  Both  Mr.  Eastman  and  the  com- 
pany reserve  the  right  to  reject  the  application  of  any  em- 
ployee to  participate   in  their  respective  donations.     The 


188  PROBLEMS  IN  BUSINESS  FINANCE 

money  realized  from  sale  of  the  stock  donated  by  Mr. 
Eastman,  as  well  as  the  interest  on  unpaid  balances,  is 
turned  over  to  the  company  to  be  used  in  welfare  work  for 
the  employees  and  administered  under  rules  and  regulations 
mutually  agreed  upon  by  Mr.  Eastman  and  the  board  of 
directors.  Employees,  who  on  January  1,  1918,  had  served 
continuously  for  two  years  or  more,  but  not  five  years,  are 
permitted  to  purchase  an  amount  of  stock  equal  to  2  per 
cent  of  the  total  salary  or  wages  earned  in  five  years  of  con- 
tinuous service.  Applications  to  participate  are  entirely 
voluntary.  By  applying  for  shares  the  employe  assumes  no 
debt.  He  may  pay  the  whole  par  value  of  his  shares  at  once, 
or  may  make  paj'ments  thereon  from  time  to  time,  as  may 
be  convenient,  or  he  maj^  paj^  for  the  shares  by  means  of 
the  dividends  received  thereon  by  the  managers  from  the 
company. 


D.     The  Montana  Power  Company 

The  Montana  Power  Company  is  offering  its  common 
stock  for  subscription  to  employees  at  $53  a  share  on  terms 
of  20%  of  the  purchase  price  down,  and  20%  thereafter 
annually.  The  previous  offering  of  stock  to  employees  about 
eight  months  ago  was  at  $Q0  a  share.  (1920-1921). 


E.     The  Midvale  Steel  df  Ordnance  Compaiiy 

Midvale  Steel  &  Ordnance  Company  is  offering  officers 
and  employees  opportunity  to  subscribe  for  not  to  exceed 
an  aggregate  of  6000  shares  at  $35  per  share.  About  a 
year  ago  it  offered  employees  and  officers  privilege  to  sub- 
scribe to  8000  shares  at  $50  per  share.  The  quota  was  over- 
subscribed bv  6046  shares.  (Early  in  1921). 


F.     A  Rubber  Company 

The Rubber    Compnay  organized  a 

Thrift  Club  among  its  employees  for  the  purpose  of 
enabling  them  to  purchase  preferred  stock  of  the  com- 
pany if  they  so  wished  to  do.  In  accordance  with  the 
plan  adopted,  the  amount  agreed  upon  beforehand  was 
deducted  from  the  weekly  wage  of  the  employee  and 
put  on  deposit  in  the  "Thrift  Bank"  until  a  sufficient 
amount  was  saved  to  enable  the  employee  to  purchase 
one  share  of  preferred  stock. 


EMPLOYEE  OWNERSHIP  189 

G.  The  Standard  Oil  Company 
The  subscription  price  to  Standard  Oil  of  New  Jersey- 
common  stock  by  employees  during  1921,  has  been  fixed 
at  155  by  the  Trustees  for  employee  stock  purchase  plans. 
This  is  the  first  price  fixed  under  the  recent  plan  for  stock 
ownership  by  employees  with  assistance  of  the  company. 
The  last  sale  of  stock  on  the  Exchange  was  1603^. 

Initial  payments  commence  with  the  first  pay-day  in 
February  and  will  continue  for  a  period  of  five  years  unless 
sooner  terminated.  The  plan  provides  that  employees  can 
subscribe  for  stock  up  to  20%  of  their  salary,  and  for  every 
dollar  so  subscribed  the  company  will  pay  an  additional  SO^!-. 

(January  28,  i;;21.) 

Questions 

1.  Analyze  critically  these  different  plans  of  employee 
ownership. 

2.  Summarize  the  chief  features  of  each  plan  for 
comparative  purposes. 

3.  Indicate,  with  your  reasons,  which  plan  or  plans 
seem  to  you  best  (a)  immediately,  (5)  in  the  long  run, 

i.  From  the  point  of  view  of  the  industry  itself, 
ii.  From  the  point  of  view  of  the  employee, 
iii.  From  the  point  of  view  of  the  public. 

4.  Do  you  think  that  any  of  the  companies  above 
listed  go  too  far  or  not  far  enough  in  the  matter? 

5.  What  effect  do  you  think  that  employee  ownership 
will  have  on  the  profits  of  the  concerns  in  question? 

6.  What  seem  to  you  to  be  the  real  reasons  for  the 
company's  encouragement  of  employee  ownership  in 
the  above  cases?    Distinguish  the  individual  instances. 

7.  Do  you  attach  any  particular  significance  to  the 
fact  that  many  of  these  schemes  were  being  more 
actively  promoted  in  1920-1921  than  ever  before? 

8.  Is  employee  ownership  more  to  be  desired  in  a 
public  utility  or  in  an  industrial  concern?    Why? 

9.  Should  an  employee  take  any  speculative  risks 
in  this  matter? 

10.  As  an  employee,  indicate  whether  you  would  sub- 
scribe to  the  stock  of  the  above  concerns,  giving  your 
reasons  in  each  case. 


190         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  59 
Employkp:  Ownership  in  Two  Old  and  Highly 
Successful  Manufacturing  Concerns 

A.     The  Dennison  Company 

The  Dennison  Manufacturing  Company  of  Framing- 
ham,  Massachusetts,  is  engaged  in  the  manufacture  and 
distribution  of  tags,  labels,  paper  boxes  and  many  other 
paper  products  and  novelties.  The  company,  dating 
back  to  1844,  has  always  stressed  ''quality"  and  fair 
dealing.  In  order  to  make  the  business  successful,  it 
must  require  from  its  managers  and  workers  long 
training  in  detail,  concentration  of  effort,  and  peculiar 
natural  aptitude.  One  of  the  reasons  for  its  success 
has  been  its  abihty  always  to  get  a  new  idea  or 
product  on  the  market  ahead  of  its  competitors. 

The  Dennison  Company  operated  as  a  partnership 
until  1878,  since  which  time  it  has  been  organized 
as  a  corporation.  In  1911,  however,  an  important 
change  in  organization  was  made  leading  to  re-incor- 
poration. Regarding  this  change,  the  company  writes 
as  follows: 

The  chief  motives  which  led  us  to  re-incorporate  the 
Dennison  Manufacturing  Company  in  1911  in  the  form  of  an 
Industrial  Partnership  were :  first- — to  provide  a  better  means 
of  distribution  of  whatever  profits  there  might  be  in  excess 
of  a  fair  return  on  capital;  second- — to  make  cetain  that  the 
voting  power  would  always  remain  in  the  hands  of  those 
intimately  acquainted  with  the  Company's  affairs.  From 
the  early  days  of  the  Company,  stock  has  been  offered  to 
employees  at  a  figure  below  its  actual  value,  but  this  plan 
proved  insufficient,  unsatisfactory  and  unfair  in  many  ways. 

Actually,  the  Dennison  Manufacturing  Company,  is 
as  the  name  of  its  voting  stock  suggests — not  a  normal 
financial  corporation,  but  a  true  industrial  partnership. 

In  so  far  as  its  corporate  fund  is  the  property  of  investors, 
it  is  in  the  form  of  preferred  stock,  which  gives  to  its  owners 
a  fixed  return,  representing  interest  and  compensation  for 
risk.  Rut  this  preferred  stock  gives  no  share  either  in  the 
net  profits  or  in  the  control  of  the  corporation.  The  investors 
are  in  the  position  of  lenders  and  not  in  any  sense  a  part  of 
the  body  corporate. 


EMPLOYEE  OWNERSHIP  191 

Each  year,  the  profits  reinaining  after  dividends  on  all 
outstanding  stock  of  any  kind  have  been  paid  are  re-invested 
in  the  business  and  against  this  investment  shares  of  stock 
are  issued  called  Industrial  Partnership  Stock. 

Two-thirds  of  this  stock  is  voting  stock  and  issued  to  the 
Managerial  Industrial  Partners  in  proportion  to  their  rela- 
tive salaries.  These  are  the  managerial  employees  of  the 
company — employees  who  have  been  with  the  Company 
at  least  5  years,  and  whose  positions  require  the  exercise  of 
managing  ability  and  control  over  methods  of  manufacturing 
and  marketing,  such  as  an  executive,  principal  foreman,  chief 
clerk,  or  principal  salesman;  or  whose  work  shows  the  use  of 
a  high  degree  of  imagination,  tact  or  business  judgment. 

Since  this  is  the  only  voting  stock,  the  entire  control  of  the 
Company  is  in  the  hands  of  the  managerial  employees,  and 
since  this  stock  is  non-transferable  and  must  be  exchanged 
for  second  preferred  stock  when  an  Industrial  Partner  leaves 
the  Company,  the  control  will  always  remain  exclusively  in 
their  hands.* 

The  remaining  one-third  of  the  Industrial  Partnership 
stock  is  voting,  and  is  distributed  among  the  Employee 
Industrial  Partners  in  relation  to  the  length  of  their  service. 
These  consist  of  all  employees  other  than  the  managerial 
industrial  partners,  who  have  been  over  three  years  with 
the  company.  All  employees  who  have  been  with  the  Com- 
pany long  enough  to  have  become  thoroughly  identified  with 
it,  thus  share  in  the  profits  of  the  Company. 

Cash  Dividends  on  Industrial  Partnership  Stock  cannot 
exceed  20%,  and  cannot  amount  to  more  than  one-half  of 
the  profits  remaining  after  Preferred  Dividends  are  paid. 
This  will  make  it  certain  that  new  men  will  always  receive 
stock  if  profits  have  been  earned  and  that  some  of  the  earn- 
ings will  be  put  back  into  the  business. 

But  if  I.  P.  Stock  is  to  be  issued  in  any  year,  there  'nust 
be  paid  a  cash  dividend  of  at  least  5%  upon  the  I.  P.  Stock 
already  outstanding,  so  that  there  will  not  be  successive 
issues  of  stock  upon  which  no  cash  is  realized. 

The  exact  amount  of  the  profits  need  not  be  issued  in  I.  P. 
Stock  each  year,  but  if  desirable,  part  may  be  held  as  tem- 
porary surplus  in  a  Surplus  Account,  which  must  not  exceed 
10%  of  the  amount  of  all  kinds  of  stock  outstanding  and 
must  be  materially  reduced  at  least  once  in  eight  years. 

Since  its  establishment  the  results  of  the  Industrial 
Partnership  plan  have  been  as  follows: 

*Except,  of  course,  when  the  control  is  transferred  to  the  preferred 
stockholders  in  the  case  of  foreclosure  for  failure  to  pay  dividends. 


192         PROBLEMS  IN  BUSINESS  FINANCE 

Number  of 
Shares  Distributed     Principal  Employees 

March,  1913 15,122  167 

March,  1914 18,604  211 

March,  1915 12,779  218 

March,  1916 12,884  228 

March,  1917 43,752  260 

March,  1918 19,015  288 

March,  1919 30,740  320 

March,  1920 57,363  364 

Average  cash  dividend  rate  on  outstanding  I.  P.  stock 
10  per  cent. 

B.  The  Studehaker  Corporation 
The  Studehaker  Corporation  dates  from  1852,  and 
was  incorporated  in  its  present  form  in  1911.  Begin- 
ning as  a  maker  of  vehicles,  the  concern  has  developed 
into  one  of  the  most  successful  automobile  companies 
of  the  United  States. 

The  following  plan  of  employee  ownership  is  followed 
by  the  Studebaker  Corporation: 

In  addition  to  the  plans  under  which  regular  employees 
receive  anniversary  checks,  annual  vacations,  pensions  and 
life  insurance,  the  directors  offer  this  opportunity  whereby 
employees  may  become  copartners  in  the  business,  and  share 
to  a  still  greater  extent,  as  stockholders,  in  the  profits  re- 
sulting from  its  operations.  The  directors  believe  that  a 
large  increase  in  the  number  of  employee  stockholders  will 
develop  the  relation  of  co-partnership  in  its  broadest  sense. 

The  plan  is  as  follows : 

1.  Continuous  service  is  necessary  to  entitle  employees 
to  purchase  stock  of  the  corporation  under  the  liberal  terms 
of  this  plan,  although  absence  of  thirty  days  or  less  due  to 
sickness,  vacations,  suspension  of  operations,  or  leave  of 
absence  will  not  be  regarded  as  interruptions  of  continuous 
service.  Absences  without  leave,  aggregating  six  full  working 
days  or  more  in  employee's  anniversary  year,  will  operate  as 
a  rupture  of  continuous  service.  Employees  who  have  been 
absent  in  the  war  service  will  not,  therebj",  affect  their  con- 
tinuous service  record. 

2.  Employees  who  have  been  in  the  service  of  the  cor- 
poration for  three  months  or  more,  may  have  common  or 
preferred  stock  purchased  annually  for  them  by  the  corpora- 
tion for  their  account,  in  an  amount  not  exceeding  Three 
Hundred  (S300)  Dollars  market  value  of  the  stock  at  the 
time  of  the  purchase,  and  in  the  aggregate  not  exceeding 


EMPLOYEE  OWNERSHIP  193 

five  (5)  shares  of  stock,  but  in  neither  case  to  exceed  twenty 
per  cent  (20%)  of  their  annual  rate  of  earnings. 

3.  AppUcations  for  purchase  of  stock  must  be  accompa- 
nied by  an  initial  payment  of  10  per  cent  of  the  estimated 
purchase  price,  and  the  remaining  40  per  cent  thereof,  which 
is  payable  by  employees,  must  be  paid  in  four  years  in  in- 
stallments of  one-fifteenth  of  the  amount  every  three  months 
after  the  date  of  purchase. 

4.  The  corporation  will  fully  absorb  the  remaining  50 
per  cent  of  the  cost  of  the  stock  (provided  employees  keep 
up  their  payments  and  remain  in  its  service  continuously  for 
four  years),  by  crediting  employee's  accounts  every  three 
months  with  one-sixteenth  of  its  half  of  the  cost  of  the  stock 
purchased. 


6.  From  the  above  table  {here  omitted)  it  will  be  seen 
that  should  an  employee  withdraw  from  this  plan  on 
September  1,  1922,  after  two  years'  participation,  he  would 
have  paid  $31.36,  and  his  credit  from  the  corporation  would 
be  $25.04,  making  a  total  of  $56.40  against  the  original  cost 
of  the  stock,  viz.:  $100.00  leaving  an  unpaid  balance  of 
$43,60.  He  could  pay  this  balance  and  receive  his  stock  or, 
if  he  so  desired,  he  could  order  his  stock  sold  at  the  then 
prevailing  market  price,  and  receive  cash  for  the  balance  to 
his  credit.  If,  for  example,  the  stock  was  sold  for  $110.00 
per  share,  he  would  receive  $66.40,  which  would  be  the 
$31.36  which  he  had  paid,  plus  $35.04  consisting  of  $25.04 
in  credits  from  the  corporation,  and  $10  in  profit  from  the 
sales  of  the  stock. 

7.  All  stock  purchased  under  this  plan  will  be  charged  to 
employee's  accounts  at  cost,  and  interest  will  be  charged 
quarterly  at  the  rate  of  6  per  cent  per  year  on  the  unpaid 
balance  of  the  purchase  price,  after  deducting  payments 
by  employees,  and  credits  by  the  corporation.  All  cash 
dividends  (and  stock  dividends  paid  on  the  common  stock) 
will  be  credited  to  the  accounts  of  employees  and  the  excess 
of  dividend  credits  over  interest  charges  will  act  as  a  reduc- 
tion in  the  amount  of  the  final  payment  to  be  made  by  em- 
ployees in  the  last  year. 

8.  Stock  certificates  purchased  for  the  account  of  em- 
ployees will  be  held  by  the  corporation  in  its  name  until  the 
expiration  of  the  fourth  year,  when,  if  payments  are  com- 
pleted, they  will  be  delivered  to  employees. 

9.  Fractional  shares  will  not  be  purchased  for  employees 
or  delivered  to  them  upon  settlement  of  their  accounts. 


194  PROBLEMS  IN  BUSINESS  FINANCE 

10.  iMiiployeos  will  not  bo  allowed  to  assign  or  transfer 
their  rights  to  stock  undelivered  under  this  plan,  which  rights 
are  personal  and  contingent  upon  continuous  service. 

11.  As  participation  in  this  plan  is  voluntary  and  in  no 
way  compulsory,  employees  may,  at  any  time,  withdraw 
from  participation,  in  which  event  the  credits  by  the  cor- 
poration will  cease  as  of  the  quarterly  date  preceding  with- 
drawal, and  will  be  forfeited  altogether  if  the  withdrawal  is 
made  inside  of  six  months  from  the  date  stock  was  purchased. 
Employees  who  withdraw  within  six  months,  shall  receive 
the  actual  amount  paid  in  by  them,  without  deductions  or 
additions.  Emploj^ees  who  withdraw  after  six  months  may 
either — (1)  pay  the  balance  due  on  the  purchase  price  of 
their  stock  and  receive  stock  certificate,  or  (2)  authorize  the 
sale  of  stock  held  for  them  at  the  prevailing  market  price, 
and  receive  in  cash  the  balance  due  them,  if  any,  consisting 
of  the  cUfTerence  Ijetween  the  orginal  cost  of  the  stock,  plus 
interest  charges,  and  the  payments  by  employees,  credits  by 
the  corporation,  dividends,  and  sales  proceeds  of  their  stock. 
Employees  withdrawing  from  the  plan  shall  not  be  permitted 
to  renew  participation  within  one  year  thereafter. 

12.  Employees  who  resign  or  are  dismissed,  or  who  fail 
to  maintain  their  instalment  payments  when  due,  wall  auto- 
matically be  withdrawn  from  the  plan  on  the  same  basis  as 
above  provided  for  voluntary  withdrawal. 

13.  In  the  event  of  death  of  a  participating  employee, 
his  heirs  or  legal  representatives  may  pay  the  balance  due 
on  his  stock,  either  in  full  or  in  instalments,  and  receive 
stock  certificates,  or  may  authorize  its  sale  on  the  terms 
herein  provided  for  voluntary'  withdrawals. 

In  a  letter  regarding  this  plan  of  employee  owner- 
ship, President  Erskine  of  the  Studebaker  Corporation 
writes  as  follow^s  under  date  of  July  8,  1921: 

The  rewards  paid  the  men  are  for  value  received,  and  in 
no  sense  may  be  considered  charity  or  w-elfare  distribution. 
We  do  not  like  these  words,  and  the  men  resent  them.  We 
claim  that  experienced  employees  are  more  valuable  than 
inexperienced  ones,  and  that  we  can  afford  to  pay  for  this 
value.  The  payments  under  these  plans  are  fixed  charges 
of  operating  the  business,  and  come  liefore  dividends  to 
stockholders.  This  year  the  aggregate  payments  will  ex- 
ceed $2,000,000.  We  have  had  the  plan  in  effect  since 
September  1,  1919,  and  are  very  much  pleased  with  the 
results  accomplished.  Our  labor  turnover,  at  all  plants,  for 
the  first  five  months  of  this  year  was  5.6%  against  108.9% 
last  year,  and  while,  of  course,  the  lack  of  employment  may 


EMPLOYEE  OWNERSHIP  195 

account  for  a  large  part  of  the  decrease  in  turnover,  we  be- 
lieve that  the  maintenance  of  the  continuous  service  records 
by  employees  has  actuated  them  to  stick  to  their  jobs. 

Questions 

1.  Contrast  carefully  the  Studebaker  and  Dennison 
plans  of  employee  ownership. 

2.  Could  the  same  plan  of  employee  ownership  be 
advantageously  used  by  the  two  companies?  State 
clearly  the  reasons  for  your  position. 

3.  To  what  extent,  if  at  all,  do  you  believe  that  the 
present  success  of  these  companies  is  due  to  employee 
ownership? 

4.  What  are  the  essential  differences  between  em- 
ployee ownership  and  profit  sharing? 


Problem  60 

Employee  Ownership  of  Preferred  Stock 

IN  A  Paper  and  Pulp  Mill 

A  large  New  England  Paper  Company,  until  recently 
unincorporated  and  very  much  of  a  family  affair,  has 
for  years  encouraged  its  employees  to  save.  Formerly 
the  company  even  acted  in  the  capacity  of  a  savings 
bank  for  the  employees  until  they  accumulated  several 
hundred  thousand  dollars. 

Due  to  very  high  war-time  earnings,  however,  the 
concern  incorporated  about  three  years  ago  in  order 
to  keep  down  its  taxes.  At  the  time  of  incorporation, 
the  employees  were  given  an  opportunity  to  invest  in 
a  prior  preference  stock,  cumulative  at  7  per  cent.  No 
other  type  of  stock  will  be  sold  to  employees. 

This  prior  preference  stock  is  followed  by  an  ordinary 
preferred  stock  and  by  a  large  common  stock  issue. 


196         PROBLi]\:S  IN  BrSlNLhS  FINANCE 

The  major  part  of  the  prior  preference  stock  was  taken 
by  the  employees,  while  almost  all  of  the  preferred 
stock  and  the  common  stock  is  in  the  hands  of  a  very 
few  men  in  whose  families  ownership  of  the  mill  has 
become  a  tradition.  In  amount  outstanding,  the  par 
value  of  the  preferred  and  common  stock  is  about  three 
times  as  great  as  the  prior  preference  stock. 

Some  of  the  protective  provisions  of  the  prior  pref- 
erence stock  are  as  follows: 

While  any  prior  preference  stock,  Series  A,  remains  out- 
standing, the  corporation  shall  not  do  any  of  the  following 
things  without  the  written  consent  or  the  authorizing  vote 
at  a  stockholders'  meeting  called  for  the  purpose  by  the 
holders  of  not  less  than  eighty  (80)  per  centum  of  the  prior 
preference  stock.  Series  A,  then  outstanding: 

A.  Change  the  purpose  for  which  the  corporation  is 
formed  or  the  nature  of  its  business; 

B.  Dispose  by  sale,  lease,  exchange,  consolidation, 
merger,  or  otherwise  of  all  or  the  principal  part  of  its 
property  and  business; 

C.  Create  any  mortgage,  pledge,  or  other  lien  of  or 
upon  an}^  of  its  property  or  transfer  any  of  its  property 
as  security;  provided,  this  shall  not  apply  to  purchase, 
money  mortgages  of  real  estate  to  be  acquired  for  cor- 
porate purposes  for  not  exceeding  seventy  (70)  per 
centum  of  the  cost  or  market  value  of  the  property, 
whichever  is  less,  or  to  mortgages  given  for  the  pur- 
pose of  refunding  mortgages  given  l)y  the  corporation 
and  outstanding  on  February  1,  1919,  to  secure  notes 
of  a  par  value  not  exceeding  the  par  value  of  the  notes 
secured  by  the  said  mortgages  existing  on  February'  1, 
1919,  issued  and  outstanding  at  the  time  the  refunding 
takes  place; 

D.  Issue  or  guarantee  any  bonds,  notes,  or  other  evi- 
dences of  indebtedness  mat\n-ing  later  than  one  year 
from  the  issue  thereof,  or  incur  any  obligations  for 
money  borrowed  maturing  later  than  one  year  from  the 
incurring  thereof,  except  as  permitted  in  subdivision  (C) 
of  this  paragraph; 

E.  Issue  prior  preference  stock.  Series  A,  which 
together  with  the  prior  preference  stock.  Series  A  and 
Series  B,  then  outstanding  shall  be  in  excess  of  the  par 
value  of  four  million  (4,000,000)  dollars,  and  then  only 
in  case — 


EMPLOYEE  OWNERSHIP  197 

(a)  After  such  issue  the  net  quick  assets  are  not  less 
than  one  hundred  (100)  per  centum  of  the  total  par 
amount  of  prior  preference  stock,  Series  A  and  Series 
B,  then  outstanding,  plus  the  amount  then  to  be 
issued,  and 

(b)  The  average  annual  net  earnings  of  the  corpo- 
ration before  the  payment  of  any  dividends  on  the 
prior  preference  stock.  Series  A  and  Series  B,  or  other 
stock,  for  a  period  of  twenty-four  (24)  calendar  months 
preceding  the  date  of  such  issue,  shall  have  been  at 
least  equal  to  three  (3)  times  the  annual  dividends  on 
the  prior  preference  stock,  Series  A  and  Series  B,  out- 
standing and  then  to  be  issued ; 

F.  Authorize  or  issue  any  other  class  of  stock  on  a 
parity  with  or  having  priority  over  the  prior  preference 
stock.  Series  A,  in  respect  of  dividends,  of  the  sinking 
fund  applicable  thereto,  or  of  payments  in  liquidation 
or  dissolution. 

Questions 

1.  Is  there  any  need  for  protecting  the  employee 
stockholders  to  the  extent  that  this  company  has  done? 

2.  Do  you  think  it  would  be  advisable  for  the  com- 
pany to  let  the  employees  buy  common  stock  also  if 
they  wish? 

3.  Just  what  does  the  company  gain  by  this  scheme? 

4.  What  do  you  think  should  be  the  attitude  toward 
employees  of  a  company  which  sells  stock  to  them? 


Problem  61 
Selling  Common  Stock  to  Employees  During  a  period 
or  Depression  in  Order  to  Secure  Working  Capital 

The  G.  Company  had  a  very  good  reputation  in  the 
trade  and  was  perfectly  satisfactory  to  its  bankers. 
When  the  business  depression  came  in  1920,  more 
working  capital  was  needed  in  the  business.  But  the 
manager  who  held  the  majority  of  the  stock,  wished 


198         PROBLEMS  IN  BUSINESS  FINANCE 

to  retain  his  control.  In  order  to  do  this  he  ar- 
ranged to  sell  additional  common  stock  to  his  em- 
ployees, who  were  to  make  a  payment  of  20  per  cent 
with  their  subscription,  the  balance  to  be  paid  over  a 
period  of  several  months.  This  scheme  resulted  in  the 
securing  of  some  immediate  cash  for  the  more  pressing 
needs. 

However,  as  money  was  needed  more  rapidly  than 
the  subscriptions  were  due,  the  owner  pledged  the  notes 
whi,ph  he  had  received  from  his  employees,  covering 
their  total  subscriptions,  as  collateral  for  a  six-months' 
loan  at  the  bank. 

When  the  depression  grew  serious  later  in  the  year 
the  employees  were  unable  to  meet  their  payments  on 
this  stock  and  hence  the  value  of  the  bank's  collateral 
was  impaired. 

Questions 

1.  Analyze  the  strength  or  weakness  of  this  attempt 
at  employee  ownership. 

2.  What  would  be  your  advice  to  the  company  at 
the  present  time? 

3.  What  do  you  expect  to  be  the  nature  of  the  future 
relations  of  this  company  with  its  employees? 


Problem  62 
Employee  Ownership  Resulting  in  Speculation 

The Company  makes  a  product  for  which 

there  is  a  wide  market  and  usually  a  steady  demand. 
Its  business  is  of  such  a  sort  that  it  was  not  particularly 
affected  by  war  conditions.  This  company's  dividend 
record  had  for  many  years  been  an  excellent  one.  It 
had  no  preferred  stock  and  no  bonds  outstanding. 


EMPLOYEE  OWNERSHIP  199 

In  order  to  reduce  the  labor  turnover,  increase  good- 
will, and  encourage  thrift  among  the  employees,  the 
company  offered  to  sell  them  new  stock  at  par,  at  a 
time  when  annual  dividends  of  14  per  cent  were  being 
paid,  and  the  stock  was  quoted  on  the  market  at  about 
180,  Several  methods  of  paying  for  the  stock  were 
open  to  the  employees.  Those  who  had  saved  a  suffi- 
cient amount  of  money  could  pay  outright ;  those  who 
had  security,  such  as  their  homes  or  liberty  bonds,  and 
the  like,  could  borrow  from  the  banks  in  order  to  make 
payment ;  and  others  were  given  the  opportunity  to  pay 
in  instalments  over  a  considerable  period  of  time. 

A  large  number  of  employees,  accordingly,  bought 
new  stock  about  the  end  of  the  year  1919.  Encouraged 
by  the  hope  of  an  apparently  sure  and  high  return, 
many  of  the  purchasers  of  stock  went  further  and  tried 
to  buy  on  a  margin  on  the  open  market.  Speculation 
in  shares  of  this  company  became  common  at  this  time. 
Naturally  the  market  price  of  the  stock  began  to  fall 
off  after  the  new  issue  had  been  sold  on  this  basis. 
Further,  with  the  1920  decline  in  business,  a  reduction 
of  dividends  became  absolutely  necessary.  Conse- 
quently both  the  employees  who  had  been  speculating 
and  those  who  had  been  buying  in  a  perfectly  legiti- 
mate manner  were  panic-stricken,  and  appealed  to  the 
company  for  help. 

In  order  to  prevent  a  real  catastrophe,  the  com- 
pany tried  to  lend  from  its  ow^n  funds  to  those  em- 
ployees who  were  holding  stock  on  a  margin  so  as  to 
prevent  their  being  sold  out.  This  was  at  a  time  when 
the  company  was  sorely  pressed  for  funds.  When  the 
stock  fell  below  par,  there  was  naturally  great  dis- 
satisfaction on  the  part  of  all  employees  who  had  pur- 
chased stock  in  an  entirely  legitimate  manner,  since 
there  seemed  to  be  no  likelihood  of  any  early  upward 
swing  in  the  market  price. 

Eventually  this  company  went  into  a  receiver's  hands 
and  the  value  'of  the  common  stock  dropped  to  a 
merely  nominal  figure.  Under  the  reorganization  plan, 
so  many  senior  securities  were  issued  that  it  is  certain 


200         PROBLEMS  IN  BUSINESS  FINANCE 

the  common  stockholders  will  probably  never  be  able 
to  realize  par  on  their  stock  and  it  will  probably  be 
years  before  they  receive  any  dividends. 

Questions 

1.  From  this  instance,  what  conclusions  can  be  drawn 
as  to  the  advantages  and  disadvantages  of  selling  stock 
to  employees? 

2.  Specifically,  what  are  the  chief  advantages  and 
chief  disadvantages  of  employee  ownership? 


C.     COOPERATIVE  OWNERSHIP 

Some  who  advocate  employee  ownership  wish  to 
carry  that  ownership  so  far  that  the  employees  will 
actually  control  the  industries  in  which  they  work.  In 
a  number  of  cases  this  result  has  been  achieved  in  a 
small  way.  Usually,  however,  such  ownership  has  been 
effected  only  when  the  workers  themselves  have  estab- 
lished their  own  enterprises,  as  in  the  case  of  the  Brother- 
hood of  Locomotive  Engineers  and  their  $1,000,000 
bank  in  Cleveland,  or  the  Brotherhood  of  Maintenance 
of  Way  Employees  and  Railway  Laborers,  who  are 
reported  to  have  invested  about  $3,000,000  in  coopera- 
tive factories.  Cooperative  associations  for  marketing 
purposes  have  been  much  more  common  and  no  doubt 
more  successful  than  cooperative  productive  enterprises. 

Though  there  has  recently  been  much  discussion  of 
this  question,  the  movement  is  of  comparatively  little 
interest  to  the  student  of  finance  except  in  so  far  as  it 
may  be  an  outgrowth  of  customer  or  employee  owner- 
ship, or  may  occasionally  raise  some  problem  of  com- 


COOPERATIVE  OWNERSHIP  201 

petition.     The  two  problems  here  given  indicate  in  a 
general  way  two  types  of  cooperative  ownership.* 

Problem  68 

FiNANCiN(i  A  New  Packing  Company  by 
Selling  Stock  to  Stock  Raisers 

In  1920,  a  company  known  as  the  "Associated  Pack- 
ing Company  of  Des  Moines,  Iowa,"  sold  $3,800,000 
of  stock,  having  gone  no  farther  with  the  construction 
than  to  secure  a  set  of  blue  prints.  Promoting  and 
advertising  expense  consumed  nearly  one-half  the 
amount  subscribed. 

The  stock  was  sold  mostly  to  farmers  upon  the  repre- 
sentation that  the  undertaking  was  a  cooperative  enter- 
prise, and  the  ground  was  well  prepared  by  the  exag- 
gerated reports  that  had  recently  been  circulated  about 
the  profits  of  the  big  meat  packers. 

The  investors  could  have  bought  the  stocks  of  the 
long  established  Chicago  companies  in  the  open  market 
at  less  than  their  book  value,  at  the  very  time  they 
were  making  their  subscriptions  to  this  new  concern's 
stock.  The  farmers  bought  in  blocks,  frequently  of 
$5,000  and  $10,000,  and  gave  their  notes,  which  were 
discounted  in  neighboring  banks,  where  they  will  have 
to  be  held  until  they  are  paid  off  by  the  produce  of 
the  farms. 

It  was  particularly  stressed  by  the  sellers  of  the  stock 
that  they  were  trying  to  "beat  the  trust,"  that  they 
would  "eliminate  the  middle  man,"  that  they  wanted 
the  farmers,  "to  be  in  on  the  ground  floor"  and  make 
profits  which  were  now  being  diverted  into  the  pockets 
of  the  five  big  packers.  They  did  not  want  business 
men  from  Des  Moines  as  stockholders — they  wanted 
farmers.  And  98  per  cent  of  the  stockholders  were 
farmers. 

*Those  who  are  interested  in  this  problem  will  find  scattering 
suggestions  in  Harris,  E.  P.,  Cooperation  the  Hope  of  the  Consumer, 
New  York,  The  Macmillan  Company,  1918;  Finn,  J.  J.,  Cooperative 
Ownership,  Chicago,  Langdon  &  Company,  1916;  and  in  Wolff,  H. 
W.,  Cooperative  Banking,  London,  P.  S.  King  &  Son,  1907. 


202         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Do  you  see  any  objection  to  making  stock-raising 
farmers  the  chief  stockholders  of  a  packing  company? 

2.  What  do  you  think  of  this  proposition? 

3.  What  might  be  the  result  if  the  producers  of  raw 
material  generally  controlled  the  manufacturing  or  dis- 
tributing concerns  which  use  or  handle  their  goods? 


Problem  04 

Financing  the  Construction  of  Buildings  by  Selling 

Stock  to  Members  of  the  Building  Trades  Unions 

The  following  circular  was  sent  to  members  of 
the  Building  Trades  Unions  in  Boston  in  the  late  sum- 
mer of  1920: 

Homes  to  be  Built 

By  the  Building  Trades  Unions'  Construction 
and  Housing  Council. 

Preamble 

The  title  of  the  organization  shall  be  "Building  Trades 
Unions'  Construction  and  Housing  Council." 

The  body  shall  consist  of  five  delegates  from  each  of  the 
building  trades  unions  of  Greater  Boston. 

To  defray  expenses  of  organizing,  an  entrance  fee  of  ten 
(10)  dollars  shall  be  charged  each  union. 

The  purpose  of  the  council  shall  be  to  carry  on  building 
construction  in  its  entirety. 

The  immediate  work  of  the  Council  shall  be  to  stimulate 
building  of  homes. 

First — By  taking  charge  of  construction  for  those  pre- 
pared to  build. 

Second — By  the  cooperation  of  the  trades  in  the  elimina- 
tion of  all  unnecessary  overhead  charges. 

Third — By  furnishing  sufficient  workers  to  construct  each 
home  quickly  and  economically,  consistent  with  good  work- 
manship. 


COOPERATIVE  OWNERSHIP  203 

To  finance  the  movement  the  Council  proposes  the  crea- 
tion of  a  Building  Fund. 

First — By  selling  shares  to  organized  labor  at  ten  (10) 
dollars  per  share. 

Second — By  organizing  a  Cooper.\tive  Bank. 

Possibilities  of  the  Council 

This  Council,  formed  by  the  rank  and  file  of  union  men 
engaged  in  the  building  trades  of  Greater  Boston,  is  truly 
representative,  being  made  up  of  five  delegates  from  each 
local  union,  and  is  unique  in  that  its  three  committees, 
Finance,  Construction,  and  General  Council,  each  include  one 
of  the  delegates,  thus  giving  every  local  represented  an  equal 
share  in  the  deliberations  and  activities  of  the  parent  body. 

The  Finance  Committee  to  have  charge  of  the  raising  and 
disbursement  of  all  financial  transactions  of  the  Council. 

The  Construction  Committee  is  to  furnish  plans,  specifi- 
cations and  estimates  of  building  activities;  to  act  as  a  board 
of  appraisers  on  land,  property  and  material;  appoint  a 
supervisor  for  general  construction;  to  employ  such  technical 
or  expert  service  as  conditions  may  warrant. 

All  action  of  the  two  committees  to  be  subject  to  review 
by  the  General  Council. 

The  Council  shall  be  incorporated  under  the  state  laws  of 
Massachusetts,  and  shall  be  known  as  The  Building  Trades 
Unions'  Construction  and  Housing  Council,  with  a  capital 
stock  of  five  hundred  thousand  (500,000)  dollars,  divided  into 
fifty  thousand  (50,000)  shares  of  a  par  value  of  $10.00  per 
share.  Shares  to  be  sold  to  organized  labor  at  the  rate  of 
$10.00  per  share,  payment  for  which  may  be  made  in  full 
or  on  instalments  of  $1.00  per  week  per  share  for  ten  weeks. 

Each  shareholder  having  one  vote  in  electing  officers  or 
determining  the  policies  of  the  Council. 

All  money  resulting  from  the  sale  of  shares  will  be  used 
for  construction  work  and  expenses  incidental  thereto. 
From  the  earnings  of  the  Council,  after  a  certain  percentage 
has  been  set  aside  for  a  reserve  fund,  the  Council  may 
declare  semi-annual  dividends. 

The  Council  proposes  to  organize  a  Cooperative  Bank 
for  the  purpose  of  assisting  home  builders. 

Buildings  do  not  grow,  they  are  constructed  by  the  build- 
ing trades  mechanics,  each  performing  his  part.  The 
building  becomes  a  standing  fact.  Since  the  building  trades 
workers  are  the  construction  force,  the  organization  of  the 
workers  is  the  only  thing  necessary  in  order  that  they  may 
carry  on  construction  in  its  entirety,  thus  eliminating  the 
so-called  overhead  cost  and  so  construct  economically. 


204  PROBLEMS  IN  BUSINESS  FINANCE 

One  could  not  conceive  of  an  organization  better  equipped, 
both  for  devising  policies  and  pcn-forniing  the  work  of  actual 
construction,  than  this  Council  made  up  of  men  whose 
daily  tasks,  from  suiKMintendent  to  laborer,  eminently 
qualify  them  for  the  duties  at  hand. 

With  no  desire  to  criticize  others  engaged  in  the  study  of 
the  housing  problem,  such  a  Council  as  this  should  command 
the  support  of  every  true  union  man.  It  is  not  too  much 
to  say  the  entire  plan  is  a  practical  one. 

The  financing  of  such  a  plan  as  this  should  not  be  a  very 
difficult  problem.  The  money  now  paid  for  rent  could  be 
used  to  purchase  a  home.  Let  every  worker  who  pays  rent 
put  SLOO  or  more  a  month  into  the  Cooperative  Bank 
which  this  Council  will  create,  and  each  member  of  organized 
labor  purchase  one  or  more  shares  of  stock.  The  building 
of  homes  could  start  at  once,  and  in  a  short  time  there  would 
be  homes  complete.  Rent  coming  in  could  be  used  for  in- 
creased building;  the  rents  need  not  be  any  higher  than 
pre-war  rates.  Inside  of  ten  to  twelve  years  you  would  own 
what  you  would  still  be  paying  rent  for  and  someone  else 
would  own. 

The  entire  plan  is  cooperation  through  which  the  workers 
shall  participate  in  the  management  of  industry.  Ever}'^ 
union  member  should  cooperate  and  purchase  stock;  every 
rent  payer  should  cooperate  and  purchase  shares  in  the 
Cooperative  Bank. 

Every  shareholder  has  a  vote. 

Questions 

1.  Analyze  the  strength  or  weakness  of  this  plan. 

2.  What  do  you  expect  the  outcome  to  be? 


CHAPTER  V 

THE  PROBLEMS  OF  RAISING 
WORKING  CAPITAL 


References: 

Babson  and  May,  Commercial  Paper,  9-130. 

Greendlinger,  Financial  and  Business  Statements,  {passim). 

Kniffin,  The  Bicsiness  Man  and  His  Bank. 

*KnifBn,  Commercial  Paper,  Acceptances,   and   Analysts    of   Credit 
Statements,  (see  particularly  pages  90-159  for  statement  analysis.) 
*Kniffin,  Practical  Work  of  a  Bank,  371-502. 
*Mathewson,  Acceptances,  Chaps,  ii,  v,  vi,  xi-xiii,  xvii,  xx-xxvi. 

Moulton,  Financial  Organization  of  Society,  427-456. 
♦Phillips,  Bank  Credit,  160-234,  260-294. 
*Shaw,  A.  W.  (Co.),  Credits  and  Collections,  77-124. 

Wall,  Banker's  Credit  Manual,  {passim). 
*Wall,  Credit  Baromelrics. 


MOST  books  which  have  been  written  on  Business 
Finance  go  httle  farther  than  the  subject  of 
raising  fixed  capital  with  the  attendant  prob- 
lems. The  securing  of  permanent  capital,  however,  is 
a  problem  which  confronts  a  business  man  only  at 
comparatively  rare  intervals,  while  the  question  of 
raising  funds  for  temporary  financing  is  forever  present. 
The  problems  of  fixed  capital  financing  are  more  or 
less  publicly  known,  whereas  the  vital  issues  relating 
to  current  financing  are  of  a  much  more  intimate  sort. 
No  academic  line  can  be  drawn  between  "fixed 
capital"  and  "working  capital."  Some  of  a  concern's 
so-called  "current  assets"  are  as  permanently  in- 
vested in  the  business  as  if  they  had  been  sunk  in 
plant  and  equipment.  Very  frequently  both  fixed  and 
working  capital  are  raised  by  the  same  financial 
operations. 

205 


206         PROBLEMS  IN  BUSINESS  FINANCE 

This  chapter,  however,  is  primarily  concerned  with 
the  securing  of  those  funds  for  current  needs,  in 
purchasing,  carrying,  or  selhng,  the  obhgations  for 
which  can  and  should  be  liquidated  within  a  year  or 
within  a  much  shorter  period  of  time.  The  problems 
which  follow  cover  the  more  important  phases  of  bank 
borrowing,  borrowing  through  commercial  paper  houses, 
and  the  use  of  trade  acceptances,  as  well  as  some  of  the 
less  common  methods  of  temporary  financing.  As 
many  concerns  have  recently  been  forced  to  raise 
capital  for  current  needs  through  public  borrowing, 
some  attention  is  also  given  to  this  situation.  (See 
also  Chapter  III,  Section  F.) 

Exercise  II 
Problem  in  Working  Capital,  Financial  Standards,  Etc. 

1 .  Select  tWee  or  more  companies  engaged  in  a  similar 
line  of  industry,  preferably  manufacturing,  but  whole- 
saling or  retailing  accepted,  and  tabulate  complete 
financial  statements,  together  with  profit  and  loss 
statements  if  they  can  be  secured,  over  a  five-year 
period  for  each  concern. 

2.  Compute  the  following  ratios: 

a.  Current  Assets  to  Current  Liabilities. 

b.  Current  Assets  to  Fixed  Assets. 

c.  Current  Assets  minus  Inventory  to  Current  Lia- 

bilities. 

d.  Net  Current  Assets  ("Working  Capital")  to  Fixed 

Assets. 

e.  Receivables  to  Inventory. 
/.    Cash  to  Current  Assets. 
g.  Cash  to  Total  Assets. 

//.  Inventory  to  Payables. 

/.    Receivables  to  Payables. 

.;'.    Inventory  to  Sales. 

A'.  Receivables  to  Sales. 

/.    Net  Worth  to  Capital  Stock. 

7?LNet  Worth  to  Sales. 

3.  Tabulate  and  present  your  results  in  graphical 
form. 


BORROWING  FROM  THE  BANKS  207 

4.  Draw  conclusions,  where  possible,  from  the  above 
studies : 

a.  As  to  the  meaning  and  significance  of  the  ratios. 
h.  As  to  the  normal  proportions  of  working  capital 

which  may  be  expected,   depending  upon  the 

type  of  business. 

c.  As  to  the  effect  which  changes  in  general  business 

conditions  have  had  on  the  industrj^ 

d.  As  to  the  credit  position  of  the  industry. 

Suggested  References:  Moody's  Manuals;  Abstract  of  the  Certifi- 
cates of  Corporations  (Massachusetts);  Standard  Corporation  Service 
(Cumulative);  Wall,  Credit  Barometrics;  Lough,  Business  Finance, 
Chaps.  XVII,  XXII. 


A.     BORROWING  FROM  THE  BANK 

Problem  6.5 
What  is  Meant  by  Bank  "Loyalty"? 

Not    long    ago    the    Bank    was    lending 

heavily  to  the Steel  Company  whose  financial 

condition  was  very  bad  and  had  constantly  been  grow- 
ing worse.  The  management  of  the  bank,  however,  had 
confidence  in  the  character  and  capacity  of  the  officers 
of  the  steel  company  and  decided  that  they  could 
probably  save  them  from  disaster  if  they  continued  to 
extend    generous    credit.     Yet,    at    no    time    was    it 

apparent  that  the Steel  Company  was  on  the 

road  to  financial  success.  Finally,  it  failed  and  in  its 
failure  broke  the  lending  bank. 

On  the  morning  after  the  bank's  doors  were  closed, 
the  president  said: 

"Loyalty  of  our  firm  to  its  customers  has  caused 
its  financial  embarrasment." 

A  financial  writer  in  one  of  the  daily  newspapers, 
commenting  on  this  occurrence,  said: 

''The  policy  of  'loyalty'  to  customers  in  times  of 
stress  is  one  of  the  poorest  recommendations  for  any 


208  PROBLEMS  IN  BUSINESS  FINANCE 

bank  for  it  is  an  indication  of  departure  from  business 
principles  which  must  inevitably  lead  on  to  disaster." 

Questions 

1.  As  a  business  man,  can  you  reconcile  these  two 
statements? 

2.  How  can  a  bank  best  show  its  loyalty  to  its  clients 
in  times  of  stress? 


Problem  OC 
The  Character  of  a  Bank's  Officials 

A  small  manufacturing  company  was  successfully 
financed  by  the  son  of  a  prominent  local  citizen  who  was 
one  of  the  influential  directors  of  the  leading  bank. 
Owing  to  the  father's  influence  the  stock  was  speedily 
sold  and  very  ample  bank  accommodations  were  se- 
cured. The  son,  however,  was  wholly  devoid  of  busi- 
ness ability  and  proceeded  to  drive  the  concern  upon 
the  financial  rocks.  The  father,  aware  of  the  situation, 
urged  the  bank  to  make  further  loans.  Finally,  he 
himself  advanced  the  company  several  thousand 
dollars  more,  taking  a  first  mortgage  on  the  property 
as  security. 

The  new  funds  sufficed  to  carry  the  company  over  a 
four  months'  period  so  that  the  preference  created  by 
the  bonds  could  not  be  set  aside  under  the  Bank- 
ruptcy Act. 

At  the  end  of  four  months,  the  company  was  thrown 
into  bankruptcy  by  the  father  who  bought  it  in  at 
twenty-five  cents  on  the  dollar  and  satisfied  his  claims 
as  the  only  secured  creditor.  The  other  creditors, 
including  the  bank  of  which  the  man  was  a  director, 
received  practically  nothing. 


BORROWING  FROM  THE  BANKS  209 

Eventually  the  business  was  re-organized  and  became 
highly  successful  under  the  direction  of  the  father  who, 
until  his  death,  remained  in  management  and  also 
maintained  his  position  as  director  of  the  bank. 

(Adapted  from  Walker,  Corporation  Finance,  p.  293,  ff.) 

Question 
Analyze  this  case  from  the  point  of  view  of  a  new 
industrial  concern  wishing  to  borrow  from  this  bank. 


Problem  67 

What  Should  the  Business  Man  Know 

About  His  Bank? 

In  the  winter  of  1920-1921  a  new  bank  was  orgaized 
in  the  city  of  Cleveland,  having  a  capital  of  S2, 000, 000. 
The  officers  have  been  successful  and  conservative 
bankers  in  various  cities  of  the  state.  On  the  Board 
of  Directors  there  are  bankers  and  business  men  whose 
reputation  is  of  the  highest  in  business  circles  in  New 
York,  Chicago,  and  Cleveland. 

There  has  been  a  good  deal  of  discussion  regarding 
this  bank  by  business  men.  Exactly  opposite  con- 
clusions have  been  drawn  regarding  the  probable 
success  of  the  bank.  Many  have  felt  that  it  would 
not  be  a  safe  place  to  do  banking,  and  have  particu- 
larly stressed  the  fact,  that,  as  they  allege,  the  bank 
was  founded  at  a  very  inauspicious  time. 

Questions 
1.  Do  you  agree  with  the  business  men  who  felt  that 
it  would  not  be  good  policy  to  patronize  this  new  bank? 
Why,  or  why  not? 


210         PROBLEMS  IN  BUSINESS  FINANCE 

2.  Specifically,  what  consideration  should  be  borne 
in  mind  by  the  business  man  in  selecting  his  bank? 
Enumerate. 


Problem  68 
Securing  Credit  Information  from  a  Bank 

A.  The Company  of  New  Haven,  Connect- 
icut, wrote  to  the Bank  of  Boston  for  credit 

information  concerning  a  business  house  which  had  no 
dealings  whatever  with  the  bank.  The  information 
called  for  was  detailed,  covering  the  latest  financial 
condition,  as  well  as  the  character  and  connections  of 
the  officials,  the  standing  of  the  company  in  the  trade, 
and  the  like. 

The  company  about  which  the  information  was 
asked  had  never  had  an  account  with  the  bank. 

Questions 

1.  Do  you  think  the  company  was  reasonable  in 
making  this  request? 

2.  How  should  you  expect  the  bank  to  handle  the 
inquiry? 

3.  If  the  request  had  come  direct  from  a  New  Haven 
bank  which  had  no  connections  whatever  with  the 
Boston  bank,  instead  of  from  the  company,  how  should 
the  matter  have  been  handled? 


B.  This  same  bank  recently  received  an  inquiry 
from  a  business  house  in  another  state  regarding  the 
credit  standing  of  a  small  concern  about  which  the  bank 
had    never    heard.     Upon    looking    further    into    the 


BORROWING  FROM  THE  BANKS  211 

matter,  it  .was  discovered  that  the  concern  was  not  listed 
in  the  Greater  Boston  Directory.  There  was  no 
possibility  that  the  company  requesting  the 
information  would  be  a  customer  of  the bank. 

Question 
1.  Under  the  circumstances,  what  kind  of  a  reply 
should  you  expect  the  bank  to  send  to  this  letter  of 
inquiry? 


Problem  C9 
The  "Industrial  Service"  of  the  Bank 

Some  of  the  largest  commercial  banks  have  developed 
extensive  "industrial  service"  departments,  the  func- 
tions of  which  vary  widely.  In  some  cases  this  depart- 
ment confines  its  activity  largely  to  supplying  signifi- 
cant trade  information  to  the  bank's  borrowers  upon 
request.  In  other  cases  an  active  attempt  is  made  to 
meet  the  customer  more  than  half  way  in  this  matter. 
In  fact,  some  bankers  as  well  as  some  business  men 
feel  convinced  that  the  solution  of  many  of  our  indus- 
trial difficulties  can  be  largely  attained  through  more 
active  banker  cooperation  of  this  sort,  since  the  bank 
is  in  a  position  to  supply  the  borrower  with  important 
information,  backed  up  by  constructive  advice  which 
could  be  secured  from  no  other  source. 

At  the  same  time  there  are  other  bankers  who  are 
vigorously  opposed  to  the  entire  scheme  of  industrial 
service  as  above  outUned.  To  paraphrase  the  words 
of  one  whose  successful  record  is  well  known,  "The 
bank's  business  is  to  lend  money  to  its  customers, 
having  assured  itself  that  their  condition  warrants  a 
loan.  It  is  not  the  proper  function  of  a  bank  to  tell  its 
customers  how  to  run  their  business,  nor  in  any  way 
dabble  into  the  affairs  of  its  clients." 


212         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  With  which  point  of  view  do  you  agree? 

2.  To  which  type  of  bank  would  you  resort  for  a 
loan  if  you  were  starting  up  in  business? 

3.  Specifically,  what,  if  anything,  does  a  bank  gain 
through  this  policy  of  "industrial  service"? 

4.  What  does  the  borrower  gain? 

5.  Does  such  a  policy  entail  any  losses, 

(a)  to  the  bank, 
(6)  to  the  borrower? 

6.  What  do  you  expect  the  future  tendency  along 
this  line  to  be?     Why? 


Prcblem  70 

Lendinc  to  a  Concern  Without  a  Statement 

OF  Condition 

A.  One  of  the  officers  of  a  very  large  bank  in  New 
England  says  that  until  recently  they  have  not,  in 
most  cases,  secured  financial  statements  from  woolen 
manufacturing  concerns  and  that  in  almost  no  instances 
were  the  annual  sales  given. 

He  explains  this  condition  by  saying  that  the  compa- 
nies are  more  or  less  family  affairs  and  that  they  simply 
refuse  to  di\'ulge  information  which  might  in  some  way 
get  into  the  hands  of  their  competitors.  He  further 
suggests  that  anyway  the  woolen  manufacturing 
business  is  a  well  seasoned  one,  and  that  most  of  the 
concerns  make  high  returns  on  their  investment.  There- 
fore, it  has  not  been  necessary  to  insist  on  the  sales 
figures,  even  when  financial  statements  were  secured. 
The  general  statement  of  the  treasurer  or  other  officer 
of  the  mills  to  the  effect  that  they  were  making 
money  was  considered  adequate. 


BORROWING  FROM  THE  BANKS  213 

B.  The Company  of  Boston  engaged jn  a 

very  large  retailing  business  has  never  furnished  a 
financial  statement  to  any  of  its  banks,  who  consider 
its  credit  to  be  A-1  in  every  respect.  When  some  of 
these  bankers  were  asked  why  they  did  not  require  a 
statement  they  gave  two  reasons: 

First,  that  the  concern  had  always  refused  to  give  a 
financial  statement  and  threatened  to  do  its  banking 
elsewhere  if  they  insisted. 

Second,  as  the  management  was  so  well  known  to 
them  and  so  conservative,  they  thought  that  no  risk 
was  being  run. 

Accordingly,  certain  Boston  bankers  continue  to 
lend  many  hundreds  of  thousands  of  dollars  annually 
to  this  company,  with  little  accurate  knowledge  of  its 
r^ffairs. 

Questions 

1.  Do  you  approve  of  this  way  of  doing  business? 

2.  Would  it  be  any  gain  for  the  company  to  be 
required  to  give  frequent  statements  of  its  financial 
condition  and  earnings?     Would  it  help  the  banks? 

3.  To  which  of  these  concerns  do  you  think  it  would 
be  safest  to  lend  without  a  financial  statement? 

4.  What  effect,  if  any,  does  competition  in  banking 
have  on  the  above  situation? 

5.  If  you  attribute  this  situation  to  competition 
among  banks  for  the  borrowers'  patronage,  should  you 
advise  doing  away  with  competition  in  banking?  Why 
or  why  not? 


214  PROBLEMS  IN  BUSINESS  FINANCE 

ProbleiM  71 

The  Relative  Importance  of  ('haracter,  Capacity, 

AND  THE  Financial  Statement 

"We  do  not  believe  in  this  intensive  and  comparative 
statement  analysis  in  connection  with  credit  granting. 
After  all,  it  is  character  and  capacity  which  really 
count.  There  are  men  to  whom  we  would  not  lend  a 
cent,  even  though  they  showed  the  best  statement  in 
the  world.  There  are  others  who  might  open  a  good 
line  of  credit  with  us,  though  they  produced  no  state- 
ment whatever.  Too  much  time  is  wasted  over  mere 
figures.  J.  P.  Morgan  says  that  he  has  frequently 
lent  as  much  as  a  million  dollars  without  security  to  men 
who  to  his  knowledge  did  not  have  a  cent  in  the  world." 

Questions 

1.  Analyze  and  criticize  from  the  business  man's 
point  of  view  the  foregoing  statement  made  by  a 
"banker." 

2.  Is  the  position  here  outlined  in  any  respect  a 
correct  one? 

3.  Would  you  differentiate  in  your  answer  between 
a  country  bank  and  a  city  bank?  Between  a  com- 
mercial bank  and  an  investment  bank?     Why? 

4.  In  making  a  straight  commercial  loan  should 
"character"  and  "capacity"  ever  be  considered  more 
important  than  the  financial  condition? 

5.  Just  what  is  the  relation,  if  any,  between  the 
financial  statement  of  a  concern  and  the  "character" 
and  "capacity"  of  the  officers  of  the  concern? 


BORROWING  FROM  THE  BANKS  215 

Problem  72 

The  Desirability  of  Giving  Full  Information 
TO  the  Bank 

Questions 

1.  What  seem  to  you  to  be  the  chief  advantages  and 
disadvantages,  if  any,  from  the  point  of  view  of  a 
business  concern  in  giving  complete  financial  state- 
ments and  profit  and  loss  accounts  to  bankers? 

2.  Do  you  consider  that  additional  information 
should  also  be  given? 

3.  What  features  should  be  most  carefully  considered 
by  the  bank  in  granting  loans  to  business  customers? 

4.  Should  the  bank  be  informed  of  all  "contingent" 
liabilities,  such  as  endorsements,  commitments  to 
purchase  goods,  and  the  like?     Why? 

5.  What  are  the  lender's  chief  sources  of  information 
regarding  the  financial  condition  of  the  smaller  business 
concerns?  Estimate  the  comparative  value  of  these 
different  sources. 

6.  Should  a  borrower  let  his  bank  know  the  purpose 
for  which  he  desires  a  loan? 

7.  How  often  should  statements  be  given?  Does 
the  size  of  the  business,  its  age,  nature,  or  the  time  in 
the  Business  Cycle  affect  the  problem? 


Problem  73 
To  What  Extent,  if  at  All,  Should  a  Bank 
Lend  on  "Fixed"  Assets? 

"A  manufacturing  concern,  established  only  a  short 
time  and  doing  a  good  business,  sought  its  first  loan. 
Its  chief  officer  made  application  in  person  at  the  bank 


216  PROBLEMS  IN  BUSINESS  FINANCE 

president's  office.  With  some  pride,  he  exhibited 
photographs  showing  the  plant,  exterior  and  interior. 

"  'We  have  the  finest  little  factory  in  the  city,'  he  said 
'and  it's  paid  for.  We  own  the  equipment,  free  of  debt. 
Except  for  raw  material,  we  do  not  owe  a  dollar.  We 
sell  our  product  on  long  credits.  We  want  to  grow, 
but  we  haven't  the  money  to  carry  more  accounts. 
We  want  the  bank  to  help  us  extend  our  credit  lines.' 

"The  banker  fumbled  the  photographs  for  a  moment 
and  complimented  their  artistic  finish.  Then  he  tossed 
them  aside  abruptly.  Tempering  his  words  with  a 
kindly  smile,  he  said: 

"  'Photographs  do  not  represent  the  best  security. 
We  do  not  lend  on  real  estate  or  factory  equipment. 
A  factory  may  be  the  best  in  the  world,  yet  be  idle 
tomorrow.  In  the  applications  that  come  to  us,  it  is 
very  common  for  business  men  to  emphasize  their 
fixed  assets  and  minimize  those  that  are  Uquid.'  " 

(Shaw,  Credits  and  Collections,  108.) 

Questions 

1.  Do  you  agree  with  the  banker? 

2.  Are  there  circumstances  under  which  you  would 
consider  "impressive"  quarters  an  important  element 
in  negotiating  a  bank  loan? 

3.  What  steps  would  you  advise  this  man  to  take  in 
order  to  secure  working  capital? 

4.  Why  should  a  commercial  bank,  as  a  rule,  not 
lend  on  the  security  of  "fixed"  assets? 

5.  Would  it  be  satisfacto  y  for  the  bank  to  take  a 
mortgage  on  plant  and  equipment,  and  the  like? 
Wehn  or  Why? 


BORROWING  FROM  THE  BANKS  217 

Problem  74 
The  "Two  to  One"  Ratio 

It  has  for  many  years  been  customary  among  the 
banks  to  insist  that  a  borrowing  business  must  show  at 
least  a  "2  to  1"  current  ratio  in  order  to  secure  loans. 
Frequently  little  else  has  been  considered. 

Questions 

1.  What  considerations  are  back  of  this  "rule  of 
thumb"? 

2.  Do  you  agree  that  a  "2  to  1"  ratio  is  necessarily 
desirable? 

3.  Under  what  circumstances,  if  any,  should  it  be 
higher  or  lower? 

4.  Does  such  a  ratio,  after  all,  really  mean  anything? 

5.  What  items  in  the  current  assets  should  be  most 
carefully  watched?     In  the  current  liabilities?   Why? 


Problem  75 
The  Analysis  of  the  Current  Ratio 

Questions 

A.  1.  Should  you  deem  a  "2  to  1"  current  ratio  satis- 
factory if  the  cash  and  accounts  receivable  are  less 
than  the  notes  and  accounts  payable? 

2.  Which  appears  to  you  to  be  the  more  liquid  as- 
set, merchandise  or  receivables? 

3.  Will  your  answer  differ  according  to  the  nature  or 
age  of  the  industry,  or  the  stage  in  the  Business  Cycle? 

B.  1.  Would  a  business  concern  be  justified  in 
expecting  a  bank  loan  equal  to  its  "accounts  re- 
ceivable"?    Greater  than  its  "accounts  receivable"? 


218 


PROBLEMS  IN  BUSINESS  FINANCE 


2.  Will  your  answer  differ  depending  upon  the  nature 
of  the  business,  the  age  of  the  business,  or  the  stage  in 
the  Business  Cycle? 

(References:  Wall,  Credit  Barometrics;  The  Annalist,  May  2,  1921, 
496-97.) 


Problem  76 

Exercise  in  Statement  Analysis 

A — General  Statement 


Assets 

Fixed  Assets $100,000 

Cash 30,000 

Accounts  receivable     50,000 

Merchandise 150,000 

$330,000 
Sales,  $200,000. 


Liabilities 

Stock $125,000 

Notes  payable 60,000 

Accounts  payable .  .     55,000 

Surplus 90,000 

$330,000 


Question 
Examine   this  statement  with   the  view  to   deter- 
mining the  type  of  concern  and  its  soundness  from  the 
credit  standpoint. 


B — Statement  of  a  Wholesale  Grocery  House 
Oct.  1,  1920 

Assets  Liabilities 
Real    Estate    and 

Equipment $1 ,800,000  Preferred  Stock .  .  $1 ,800,000 

Goodwill 1,500,000  Common  Stock..  .    1,200,000 

Cash 300,000  First   Mortgage 

Accounts  receiv-  bonds 1,500,000 

able 1,825,000  Notes  payable. . . .    1,200,000 

Merchandise 1,775,000  Accounts  payable.      300,000 

Surplus 1,200,000 

$7,200,000  $7,200,000 

Sales,  $19,200,000. 


'BORROWING  FROM  THE  BANKS  219 

Analyze  this  statement  critically,  bearing  in  mind 
the  following  among  other  questions: 

Questions 

1.  Does  the  concern  discount  its  bills? 

2.  Is  the  merchandise  inventory  properly  valued  and 
salable? 

3.  What  elements  of  weakness,  if  any,  are  to  be 
found  in  the  statement? 

4.  What  would  be  your  opinion  of  the  ''capacity"  of 
the  management? 

5.  Do  you  expect  that  this  concern  should  be  able  to 
borrow  more  money  from  its  banks  or  commercial 
paper  houses?     If  so,  how  much? 


Questions 

1 .  Analyze  the  following  statements  with  a  view  to 
determining  the  elements  of  strength  and  weakness 
indicated  thereby,  and  the  amount  which  the  bank  can 
safely  loan.  Bear  in  mind  also  the  light  which  they 
may  throw  on  the  quality  of  management. 

2.  Using  the  same  statements,  but  assuming  the 
dates  of  the  first  two  to  be  two  or  three  years  later, 
and  the  dates  of  the  last  two  to  be  two  or  three  years 
earlier,  make  the  same  analyses. 

(a)     Statement  of  a  Packing  Company 

Nov.  1,  1914 

Assets  Liabilities 

Plant,  etc S400,000      Stock $600,000 

Cash 125,000      Bills  payable 450,000 

Accounts  receiv-  Accounts  payable.        50,000 

able 225,000      Surplus. 75,000 

Merchandise 425,000 


$1,175,000  $1,175,000 

Sales,  $7,500,000. 


220  PROBLEMS  IN  BUSINESS  FINANCE 

(b)    Statement  of  a  Piano  Manufacturing  Company 
July  1,  1917 

Assets  Liabilities 

Cash $15,000      Bills  payable $150,000 

Accounts  receivable    50,000  Accounts  payable .  .     50,000 

Bills  receivable 500,000      Capital  Stock 300,000 

Merchandise 300,000  Surplus   and   Undi- 

Plant,  Real  Estate.    100,000  vided  Profits.  .  .  .   465,000 

$965,000  $965~000 


(f)     Statement  of  a  Maker  of  Ladies'  Style  Shoes 
July  1,  1920 

Plant,  etc $100,000  Partners'  capital. .  .$150,000 

Cash 20,000  Accounts  payable .  .     75,000 

Accounts  receivable     50,000      Notes  payable 35,000 

Notes  receivable .  .  .     30,000  (to  bank) 

Merchandise 100,000      Surplus 30,000 

$300,000  $300,000 

(f/)    Statement  of  the   Worsted  Mills 

July  31,  1920 
Assets 

Cash  on  hand  and  in  banks $1,527.45 

Accounts  receivable 243,262.86 

Inventory 668,508.96        $913,299.27 

Real  Estate 363,794.63 

Machinery,  Tools  and  Fixtures 305,853.40 

$1,582,947.30 

Accounts' payable 85,797.28        $277,797.28 


Liabilities 
Notes  payable $192,000.00 


Bonds  on  Real  Estate  and  Machin- 
ery due  1921 500,000.00 

Capital  Stock 500,000.00 

Surplus  July  31,  1919 $338,939.25 

Less:  6%  Int.  on  Bonds  $30,000 

2%  Div.  paid .  .  .    10,000        40,000.00 

$298,939.25 

Net  profit  for  Year 6,210.77 

Present  Surplus  Account $305,150.02         305,150.02 

$1,582,947.30 
Volume— $1,451,960.91. 

(Signed)   Worsted  Mills 

By ,  President 


BORROWING  FROM  THE  BANKS  221 

D 

Comparative  Statement  of  a  Rubber  Tire  Company 

(0,000— omitted) 

Statements  made  as  of  October  31st  of  each  year 

Assets 

1920        1919       1918  1917  1916      1915      1914 

Cash $167     $1,040      $635  $378  $345 1 

Notes  &  a/cs  rec.     1,255       2,364     1,387  1,638  1,001  (    $785      $647 

Merchandise....     4,117       3,557     3,051  2,850  1,694        776        457 

Fixed  Assets 5,512       3,526     2,579  2,494  1,269        785        681 

Investments  in  & 
advances  to  sub- 
sidiaries       4,257          558        554  522        248        

Miscellaneous 917        708  289  315        226        304 

Deficit 1,565       

$16,873  $11,962  $9,314  $8,171  $4,872  $2,572  $2,089 

Liabilities 

Notes  payable...   $2,388  $950\ 

Accts.  payable. . .      1,710  1,049/    $808  $2,103      $917  $194  $67 

Reserve  for  Taxes     137     

Capital  (prefer.).     6,613  3,667     3,878     2,439     1,750  665  700 

Capital  (com.)...     5,990  2,076     2,047     2,028     1,750  838  799 

Surplus 3,333     2,071     1,276        225  703  405 

Reserve 172  750        510        325        230  172  118 

$16,873  $11,962  $9,314  $8,171  $4,872  $2,572  $2,089 

Contingent  LiabiHties,  $860.     Not  reported. 

1920       1919        1918        1917       1916      1915      1914 
Sales I  .  .  .$18,G00  $16,900  $13,100  $11,100  $6,400  $3,600  $3,100 

Dividends    Preferred    7%\ 

Common  12%)     during  the  entire  period. 

Questions 

Analyze  the  above  statements  comparatively  with 
a  view  to  determining, 

(a)  Whether  the  managerial  policy  has  been  a  wise 
one; 

(6)  What  elements  of  weakness  or  strength  are 
indicated ; 

(c)  When,  if  at  all,  was  the  turning  point  passed 
which  portended  financial  difficulty? 


222         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  77 
Looking  Beyond  the  Balance  Sheet 

"Banking  and  investment  losses  are  occasioned  by 
ignorance  even  by  corporations  themselves  of  vital 
conditions,  plant  location,  nature  of  the  product, 
manufacturing  methods,  industrial  and  trade  relations, 
and  general  and  financial  policies  among  features 
requiring  expert  analysis.  Some  companies  n  the 
last  year  or  two  have  caused  their  bankers  losses  run- 
ning into  the  mi  lions  because  the  officers  of  these 
companies  and  of  the  banks  did  not  have  a  knowledge 
of  world  supplies  of  such  raw  material  as  sugar  or 
copper.  There  are  many  other  factors  that  a  balance 
sheet  does  not  reveal.  Take  the  matter  of  the  loca- 
tion of  the  plant.  Such  days  of  competition  as  the 
present  ones  will  seek  out  the  uneconomical'y  located 
plant  and  close  it  up,  and  the  bankers  who  floated  the 
securities  of  such  a  corporation  and  the  stockholders 
who  first  bought  them,  will  be  left  wdth  the  bag  to  hold 
if  they  have  not  seen  the  handwriting  on  the  wall 
and  unloaded  on  to  others.  As  another  instance, 
consider  the  labor  situation.  Take  certain  of  the 
New  York  clothing  manufacturers,  who  won  battle 
after  battle  with  their  labor,  to  wind  up  only  a  jump 
or  two  ahead  of  the  sheriff.  The  problem  is  much  too 
broad  for  any  method  of  basing  credit  on  the  fixed 
assets  or  moral  character  of  a  company.  The  dif- 
ference between  corporate  success  and  failure  is  often 
the  difference  between  99  and  101  per  cent,  and  this 
narrow  zone  can  be  affected  in  many  ways." 

(Adapted  from  The  Annalist,  April  25,  1921.) 

Questions 
Do  you  agree  fully  with  the  above  statement?     If 
not,  why  not? 


BORROWING  FROM  THE  BANKS  223 

Problem  78 
The  Twenty  Per  Cent  Deposit  Requirement 

It  is  customary  for  most  banks  in  the  eastern  sec- 
tion of  the  country  to  require  that  their  commercial 
borrowers  shall  keep  on  deposit  with  them  an  amount 
of  cash  equal  to  20  per  cent  of  the  maximum  line  of 
credit  extended  during  the  year.  No  interest  is  ordi- 
narily paid  on  such  deposits.  This  requirement,  while 
frequently  departed  from,  is  theoretically  in  effect 
irrespective  of  the  average  amount  of  borrowing  during 
the  year.  In  normal  times  there  are  numerous  in- 
stances in  which  a  concern  will  keep  this  amount  on 
deposit  without  borrowing  anything  from  the  bank. 

Questions 

1.  How  do  you  account  for  the  origin  of  this  custom? 

2.  Do  you  approve  of  the  practice? 

3.  Does  it  seem  to  be  a  necessary  requirement?  If 
so,  why?  If  not,  what  improvements  or  changes  can 
you  suggest? 

4.  What  does  the  bank  gain  from  this  requirement? 

5.  Does  the  borrower  gain  anything? 

6.  Should  the  bank  pay  interest  on  this  compulsory 
deposit? 

7.  What  should  be  the  bank's  attitude  toward  a 
customer  who,  when  not  actually  borrowing,  lets  his 
deposits  fall  below  the  stipulated  per  cent? 

8.  Will  your  answer  to  the  above  question  be 
affected  by  the  nature  or  size  of  the  borrowing  con- 
cern, or  the  stage  in  the  Business  Cycle? 


224         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  79 
Need  for  Maintainixc  the  Required  Bank  Balances 

The  A.  B.  Shoe  Manufacturing  Company  is  a  closed 
corporation,  the  stock  being  almost  solely  held  by  a  few 
relatives  who  are  men  of  experience  in  the  shoe  business, 
though  this  particular  concern  is  relatively  new.  Ac- 
cording to  the  financial  statement  of  the  company 
submitted  to  its  banker  as  of  December  31,  1919,  the 
business  was  making  a  good  deal  of  money  and  its 
current  position  was  apparently  satisfactory.  A  net 
worth  of  $300,000  was  shown,  and  on  the  strength  of 
its  statement  it  was  an  easy  matter  for  the  A.  B. 
Company  to  extend  its  lines  of  credit  with  its  old  bank 
to  the  amount  of  $75,000  and  to  open  up  new  lines  of 
credit  of  an  equal  amount  with  two  other  banks. 
While  actually  borrowing  from  these  banks  the  custom- 
ary deposit  of  20  per  cent  of  the  line  was  kept. 

During  the  first  half  of  1920  the  concern  continued  to 
make  money  but  still  carried  a  relatively  heavy 
inventory.  The  old  bank  at  this  time  cautioned  the 
company  to  go  easy  and  to  be  sure  to  keep  an  ample 
deposit  with  the  two  new  banks  with  which  lines  of 
credit  had  been  established.  However,  as  the  lines 
from  the  other  two  banks  had  been  of  a  temporary 
sort,  it  let  the  balances  drop  low  as  soon  as  it  was 
able  to  "clean  up".  During  the  second  half  of  the 
year  1920  the  concern  began  to  lose  money  rapidly, 
because  of  returned  goods,  cancelation  of  orders,  shrink- 
age of  inventory,  and  so  on,  so  that  by  the  end  of  the 
year  not  only  had  the  appreciable  profits  of  the  first 
half-year  been  wiped  out,  but  also  the  capital  was  im- 
paired to  the  extent  of  $100,000. 

Early  in  1921  the  concern  applied  to  its  old  bank  for 
an  additional  loan  as  well  as  for  advice.  The  bank, 
however,  was  very  reluctant  under  the  circumstances, 
in  view  of  the  impaired  equities  and  frozen  condition, 
to  extend  any  further  loan,  and  asked  the  A.  B.  Company 
if  it  could  not  use  its  lines  at  the  other  two  banks.  Par- 
ticular inquiry  was  made  regarding  the  proportion  of 


BORROWING  FROM  THE  BANKS  225 

deposits  kept  at  these  other  banks,  whereupon  it 
appeared  that  instead  of  keeping  the  customary  20 
per  cent  of  the  Une  which  would  have  been  about 
$15,000  in  each  bank,  a  deposit  of  not  more  than 
$1,000  to  $2,000  was  being  kept  in  each,  the  other 
cash  resources  having  been  absorbed  by  the  unsatisfac- 
tory transactions  of  the  past  six  months.  The  A.  B. 
Company,  however,  seemed  to  feel  confident  that  the 
line  of  credit  would  be  extended  to  the  full  amount  of 
$75,000  if  desired. 

Fearing  that  this  was  an  impossible  situation,  an 
officer  of  the  first  bank  went  to  the  other  two  banks  along 
with  a  representative  of  the  A.  B.  Company.  These 
banks  stated  that  they  would  not  under  any  circum- 
stances make  a  loan  unless  the  full  20  per  cent  bal- 
ance was  kept  with  them.  The  company,  however, 
was  at  the  end  of  its  resources  and  knew  of  no  way 
of  providing  such  a  balance.  Finally  it  was  arranged 
that  the  old  bank  would  extend  its  line,  now  being 
used  to  the  limit,  to  the  amount  of  about  $30,000, 
which  it  furnished  in  cash  to  the  A.  B.  Company. 

The  company  thereupon  deposited  this  sum  in 
equal  amounts  with  the  two  other  banks,  who  then 
agreed  to  extend  credit  as  needed  and  not  to  press  for 
immediate  payment.  The  official  of  the  old  bank  who 
was  responsible  for  this  temporary  solution  of  the 
difficulty,  says  that  their  own  line  was  extended  and 
increased,  and  they  had  used  their  influence  with  the 
other  banks  in  their  customer's  behalf,  solely  because 
of  their  confidence  in  the  character  of  the  customer. 
The  customer's  finances  by  the  middle  of  1921  had 
grown  worse  rather  than  better,  though  practically  all 
merchandise  customers  were  paid  off  and  the  inven- 
tories were  being  liquidated. 

Quesiio?is 

1.  What  particular  weaknesses  in  financial  manage- 
ment are  shown  in  this  problem? 

2.  Should  the  old  bank  have  come  to  the  assistance 
of  the  A.  B.  Company  in  the  way  indicated? 


226         PROBLEMS  IN  BUSINESS  FINANCE 

3.  Should  the  other  two  banks  have  been  wilHng, 
under  the  circumstances,  to  lend  further  to  the  A.  B. 
Ccmpany? 

4.  Can  you  suggest  any  better  way  whereby  the  A. 
B.  Company  could  have  financed  itself  over  this 
period? 

5.  What  do  you  expect  to  be  the  outcome  of  the 
present  situation? 

6.  What  specific  light  does  this  problem  throw  on  the 
general  financial  situation  in  1921? 


Problem  80 

Should  a  Borrowing  Concern  Pay  Off  All  of  Its 

Bank  Loans  at  Least  Once  Each  Year? 

The  statement  is  frequently  made  that  theoretically 
the  borrowing  concern  should  at  least  once  during  the 
year  "clean  up"  its  bank  and  commercial  paper  loans, 
that  is,  it  should  pay  off  all  its  temporary  borrowings. 
In  practice,  however,  most  bankers  admit  that  this 
rarely  happens. 

Questions 

1.  What  seems  to  be  the  reason  for  such  a  "rule"? 
Is  it  really  desirable  that  a  borrowing  concern  follow  it? 

2.  Can  you  think  of  concerns,  which,  from  the 
nature  of  their  business,  should  "clean  up"  oftener 
than  once  per  year?     Less  frequently? 

3.  Would  you  make  any  distinction  between  a 
"seasoned"  business  and  a  new  business  in  this  matter? 
Why? 


BORROWING  FROM  THE  BANKS  227 

Problem  81 
How  Extensively  Should  a  Business  Borrow? 

It  is  the  practice  among  some  business  concerns  to 
arrange  for  a  line  of  credit  with  several  banks,  though 
they  confine  their  borrowing  largely  to  one  or  two 
institutions.  Some  follow  the  practice  of  opening 
lines  of  credit  in  cities  remote  from  the  place  where 
their  business  is  done.  Some  of  the  concerns  which 
follow  this  policy  say  that  it  not  only  gives  greater 
credit  protection  but  also  has  a  useful  advertising  value. 

A  well-known  business  man  recently  said  that  he 
considered  it  to  be  a  wise  policy  for  a  business  not  only 
to  arrange  for  a  larger  line  of  credit  than  it  expects  to 
need,  but  also  even  to  borrow  money  temporarily 
which  is  not  needed  in  the  business,  for  the  purpose  of 
letting  the  bank  know  "Who's  Who." 

Question 
1.  From  the  point  of  view  of  the  business  itself,  what 
seem  to  you  to  be  the  chief  advantages  or  disadvantages 
of  borrowing  in  the  manner  indicated? 


Problem  82 
How  Much  Business  Can  a  Concern 
Afford  to  Do  on  Credit.^ 

A  well-known  banker  recently  wrote  as  follows: 

"How  much  can  I  afford  to  sell?  How  much  business 
can  I  afford  to  do? 

"The  usual  answer  pertly  given,  would  be  'AH  that  I 
can.  How  else  can  I  go  forward?'  It  seems  ridiculous 
to  think  that  a  man  may  have  more  business  than  is 
good  for  him.  Yet  it  has  been  my  experience  that  a 
large  portion  of  the  business  difficulty  which  results  in 


228         PROBLEMS  IN  BUSINESS  FINANCE 

financial  difficulty,  comes  through  failing  to  ask  whether 
or  not  orders  should  be  taken  beyond  a  certain  amount. 
This  amount  will  vary  according  to  circumstances  and 
according  to  the  business.  It  can  be  regulated  by 
principles,  but  not  by  fixed  rules. 

''There  is  only  one  chance  in  a  thousand  of  staying  in 
business,  say,  five  years  if  credit  is  forced  to  serve  as 
capital." 

(W.  F.  H.  Koelsch,  in  System,  August  1921,  p.  145  ff.) 

Questions 

1.  How  can  a  concern  determine  how  much  business 
it  is  safe  to  do  on  a  given  amount  of  capital? 

2.  When,  if  at  all,  is  it  wise  to  use  temporary  bor- 
rowings for  investment  in  fixed  assets? 

3.  What  factors  determine  the  relative  amount  of 
working  capital  needed  in  a  business? 

(Reference:  Lough,  Business  Finance,  380-414.) 


Problem  83 
Bank  Loans  and  Government  Regulation 

"Shortly  after  the  income  tax  law  became  effective, 
a  manufacturer  of  metal  goods  filed  a  statement  of 
his  financial  condition,  and  when  it  was  turned  over  to 
the  credit  department  for  analysis,  a  sharp  decrease  in 
net  worth  was  uncovered.  As  the  various  items 
on  the  comparative  statement  were  balanced  one 
against  the  other  over  a  period  of  years,  the  latest 
statement  showed  evidences  of  manipulation. 

"The  outside  investigator  was  sent  to  the  customer's 
plant  with  instructions  to  make  a  survey  of  the  business 
for  the  past  year.     As  was  usually  his  line  of  action,  the 


OPEN  MARKET  BORROWING  229 

investigator  did  not  attempt  a  detailed  audit,  but 
endeavored  rather  to  look  over  the  stock,  prove  up  the 
condition  of  the  trade,  and  gather  other  pertinent 
information  of  a  general  character. 

"While  he  was  at  the  plant,  the  manufacturer  hast- 
ened to  the  bank  and  sought  out  the  credit  manager. 

"  'Why  did  you  send  an  investigator  to  my  plant?'  he 
asked,  half  angrily,  half  like  a  boy  whose  pride  has  been 
wounded.  And,  without  giving  the  other  man  a  chance 
to  answer,  he  launched  forth  a  violent  protest  against 
the  bank's  action.  'I've  been  a  good  customer  of  this 
bank  and  I'll  not  be  watched  like  a  criminal,'  he  said, 
emphasizing  his  words  by  pounding  on  the  top  of  the 
mahogany  desk. 

"In  the  midst  of  this  tirade  the  investigator  walked  in 
and  reported  there  was  nothing  to  indicate  a  reduction 
in  the  concern's  net  worth  and  that  there  must  be  some 
mistake  in  the  last  statement.  Calmed  by  this  un- 
expected interruption,  the  manufacturer  changed  his 
attitude  and  confessed  that  he  had  purposely  made  an 
artful  error  in  the  statement. 

"  'That  was  a  copy  of  the  statement  I  submitted  to 
the  government,'  he  explained,  'and  I  left  it  the  same 
for  you  so  if  it  were  checked  up  at  any  time  it  would 
show  no  discrepancies.'  " 

(Shaw,  Credits  and  Collections,  68-69.) 

Questions 

1.  What  in  your  opinion,  have  been  the  chief  effects 
of  the  national  tax  laws  on  the  relations  existing 
between  business  concerns  and  their  banks? 

2.  How  has  the  Federal  Reserve  Act  affected  the 
situation? 


230         PROBLEMS  IN  BUSINESS  FINANCE 

B.     OPEN  MARKET  BORROWING 

Problem  84 
A   Small  Company   Borrowing   on   the  Open  Market 

The Overall  Company  referred  to  in  an  ear- 
lier problem*  had  in  recent  years  been  selling  a  little 
paper  on  the  open  market.  There  had  been  consistent 
growth  for  several  years,  but  the  financial  statement 
had  shown  little  change  so  far  as  the  various  relations 
were  concerned,  until  1919.  Further,  so  large  a  surplus 
had  been  built  up  out  of  earnings,  as  a  result  of  con- 
servative management,  that  the  reputation  of  the  com- 
pany was  apparently  very  high  with  those  bankers  and 
merchants  who  had  dealings  with  the  concern. 

By  1920,  however,  as  a  result  of  the  expansion  policy 
earlier  described,  the  balance  sheet  showed  some 
marked  changes,  though  the  current  ratio  remained 
practically  as  before.  The  following  financial  state- 
ments indicate  the  general  condition : 

Assets                              1919  1920 

Plant  account,  etc $200,000  $1,000,000 

Inventory 100,000  400,000 

Accounts  receivable 70,000  100,000 

Cash 30,000  50,000 

$400,000  $1,550,000 

Liabilities 

Capital  Stock $100,000  $1,000,000 

Bonds 225,000 

Accounts  payable 25,000  100,000 

Notes  payable 75,000  175,000 

Surplus 200,000  50,000 

$400,000  $1,550,000 

The  larger  number  of  notes  payable  were  those  which 
had  been  sold  to  various  banks  by  note  brokers,  who, 
owing  to  the  excellent  record  of  the  company  in  the  past, 
found  no  difficulty  in  placing  the  small  issues. 
During  the  fall  of  1920,  one  of  the  holders  of  this 
company's  notes  failed  to  receive  payment  when  the 

*Problem  30 


OPEN  MARKET  BORROWING  231 

note  was  due.  Accordingly  an  inquiry  was  sent  by 
this  bank  to  its  correspondent  bank  in  New  York  City 
with  the  request  that  the  financial  standing  of  the 
company  be  carefully  checked  up. 

The  New  York  Bank  accordingly  made  use  of  its 
various  channels  of  information,  securing  letters  from 
banks  which  held  the  company's  paper  or  had  loaned 
it  money  directly,  from  merchants  who  had  had  deal- 
ings with  the  concern,  and  from  commercial  agencies. 
All  reports  received  were  uniformly  favorable.  The 
excellent  management  of  past  years,  in  which  there  had 
been  no  changes,  was  particularly  stressed. 

Questions 

1 .  What  would  be  your  analysis  of  the  situation  here 
indicated? 

2.  Should  this  concern  be  selling  paper  on  the  open 
market?     W^hy? 

3.  Should  you  agree  with  the  reports  submitted  by 
the  various  sources?  If  not,  how  do  you  account  for 
their  favorable  reports? 

4.  Would  the  company's  financial  position  be  better 
at  the  present  time  if  it  had  borrowed  solely  from  the 
banks?     Why? 

(Consult  Phillips,  Bank  Credit,  260-294.) 


Problem  85 

Is  THE  "Quality"  of  Commercial  Paper  Related  to  the 

Nature  or  the  Industry  Engaged  in  by 

THE  Borrowing  Concern.'' 

"The  nearer  the  inventory  is  to  the  absolute  raw 
material  of  standard  size  and  fineness,  the  more  liquid 
it  is  and  hence  the  more  advantageous  as  an  asset." 


232         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Do  you  agree  with  this  statement? 

2.  If  so,  indicate  briefly  those  concerns  whose  com- 
mercial paper  should  have  the  readiest  market. 


Problem  86 
The  Commercial  Paper  Market  and  the  Business  Cycle 

It  is  reported  (1920-21)  that  many  of  the  largest 
banks  both  in  Boston  and  New  York  have  purchased  no 
commercial  paper  for  three  or  four  years.  On  the  other 
hand,  many  of  the  smaller  "country"  banks  are  in- 
vesting rather  heavily  in  commercial  paper.  In  fact, 
had  it  not  been  for  these  ''country"  banks,  it  is  esti- 
mated that  many  of  our  large  business  concerns  would 
have  failed  during  the  past  year. 

Questions 

1.  How  do  you  account  for  the  situation  here 
indicated? 

2.  Should  you  expect  to  find  a  different  state  of 
affairs  in  normal  times?     Why? 

3.  Is  the  above  'situation  a  safe  cne?  Why  or  why 
not? 


Problem  87 
General  Questions  on  the  Use  or  Commercial  Paper 

Questions 
1.  Should  a  concern  borrowing  on  the  open  market 
give  more  information  to  the  broker  regarding  its  finan- 
cial affairs  than  it  would  ordinarily  give  to  its  bank? 


OPEN  MARKET  BORROWING  233 

2.  Should  you  expect  it  to  be  possible  for  a  financially 
weak  concern  to  sell  its  paper  to  note  brokers? 

3.  Can  you  suggest  any  limitations  on  open  market 
borrowings  dependent  on  the  size  or  type  of  business 
attempting  to  sell  its  commercial  paper? 

4.  Is  it  a  wise  policy  for  a  business  to  borrow  only 
through  commercial  paper  houses? 

5.  Do  you  consider  it  sound  poUcy  for  a  bank  to  buy 
the  commercial  paper  of  a  concern  to  which  it  is  already 
extending  a  line  of  credit?  How,  if  at  all,  might  this 
practice  affect  the  business  situation? 

6.  (a)  From  a  point  of  view  of  a  business  concern, 
what  are  the  advantages  and  disadvantages  of  open 
market  borrowing? 

(6)  Sum  up  the  situation,  also,  from  the  point  of 
view  of  the  bankers. 

(Reference:  Phillips,  260-294.) 


Problem  88 

What  a  Supposedly     Strong  Concern  Can  Do 

BY  Borrowing  Through  Note  Brokers 

A  striking  illustration  of  what  can  happen  to  a 
concern  using  the  open  market,  is  furnished  by  the 
borrowing  operations  of  the  H.  B.  Claflin  Company 
of  New  York,  which  failed  in  1914. 

"This  concern,  which  was  one  of  the  largest  wholesale 
dry  goods  houses  in  the  world,  had  affiliated  with  it  a 
manufacturing  concern  and  twenty  or  more  retail 
stores.     The   retail   stores   bought    of   the   wholesale 


234         PROBLEMS  IN  BUSINESS  FINANCE 

house  on  open  account,  until  the  accounts  reached 
certain  amounts  when  notes  would  be  given  in  payment 
of  the  accounts.  These  notes  the  H.  B.  Claflin  Com- 
pany would  endorse  and  steadily  offer  for  discount 
over  a  wide  area,  generally  through  note  brokers. 
As  to  the  amount  of  endorsed  paper  outstanding  at  any 
time,  brokers,  fearful  of  losing  the  lucrative  business, 
were  reluctant  to  inquire  and  bankers  only  guessed. 
The  key  to  the  explanation  of  the  willingness  of 
bankers  to  buy  paper  offered  under  such  uncertain 
conditions  was  the  personal  esteem  in  which  Mr.  H.  B. 
Claflin,  the  head  of  the  concern,  was  held.  One  of  the 
foremost  citizens  of  the  metropolis,  he  had  cultivated 
a  personal  acquaintance  with  prominent  bankers  over 
extensive  territory. 

"It  was  known  that  everybody  held  Claflin  paper 
and  it  developed  at  the  time  of  the  failure  that  the 
Claflin  receivables  or  endorsements  were  diffused 
among  2000  to  3000  banks.  If  everybody  wants  the 
paper,  the  bankers  seem  to  have  reasoned,  it  must  be 
good.  The]very  knowledge  that  everyone  else  is  carry- 
ing the  paper  of  a  given  house  that  a  banker  thinks 
well  of,  is  a  source  of  satisfaction  to  him.  If  failure 
should  occur  others  would  share  his  disappointment. 

"In  June,  1914,  with  tight  money  prevaihng,  the  con- 
cern was  unable  to  market  more  paper  through  its 
brokers  and  asked  for  temporary  additional  assistance 
from  its  bankers.  The  bankers  interested  cooperated 
in  making  an  examination  of  the  affairs  of  the  company, 
uncovering  direct  indebtedness  of  $9,000,000  and 
contingent  liabilities  of  almost  $32,000,000,  repre- 
senting the  endorsed  notes  of  the  retail  stores,  the 
condition  of  which  was  a  depressing  revelation  to  the 
bankers  concerned.  Quick  assets  amounted  to  ap- 
proximately $12,000,000.  In  spite  of  having  long  paid 
five  or  six  per  cent  dividends  the  concern  had  been 
insolvent  for  several  years.  The  note  brokerage 
system  had  prolonged  the  life  of  the  company  at  the 
expense  of  the  banks." 

(Quoted  from  Phillips,  Bank  Credit,  285-286.) 


OPEN  MARKET  BORROWING  235 

Question 
What  conclusions  can  be  drawn  from  this  incident 
regarding  open  market  borrowing  and  its  relation  to 
direct  bank  borrowing? 


PUOBLEM   89 

How  A  Small  Concern  Borrowing  Solely  on  the 
Open  Market  Deceived  Its  Creditors 

Not  many  years  ago,  a  concern  in  the  Middle  West 
failed  to  the  extent  of  nearly  $1,000,000.  Of  this 
amount  less  than  $100,000  had  been  borrowed  directly 
from  the  bankers.  However,  about  $800,000  in  com- 
mercial paper  had  been  sold  through  note  brokers 
to  small  banks  throughout  the  country.  On  this  paper 
they  suffered  a  complete  loss.  None  of  the  paper  had 
been  placed  in  the  city  where  the  business  house  was 
located,  and,  further,  the  concern  had  practically  no 
accounts  payable  for  merchandise  outstanding.  In  fact, 
so  far  as  the  trade  was  concerned,  its  credit  seemed  to 
be  A-1. 

Questions 

1.  How  do  you  account  for  this  episode? 

2.  Could  this  situation  have  arisen  if  the  concern 
had  done  most  of  its  borrowing  from  local  banks?     • 
Bg^3.  Does  this  failure  reflect   most   discredit   on   the 
borrower,  the  note  brokers  who  sold  their  paper,  or  on 
the  banks  which  bought  it?     Give  your  reasons. 


236  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  90 

What  Stki's  Shall   be  Taken   When   the   Commercial 

Paper  Market  is  No  Longer  Open? 

The  B.  Company  is  engaged  largely  in  the  manufac- 
ture of  woolen  dress  goods.  It  has  always  had  the 
reputation  of  being  very  conservatively  managed  and 
its  credit  with  the  banks  has  been  excellent.  Even 
though  small  it  has  been  able  to  sell  its  paper  on  the 
open  market  without  question.  However,  the  banks 
are  now  much  concerned  about  the  company's  present 
credit  position.  The  following  financial  statements 
show  the  financial  condition  of  the  company  at  the  end 
of  1919  and  at  the  end  of  1920. 

Comparative  Statement  of  the Manufacturing 

Company 
Filed  with  the  Massachusetts  Commissioner  of  Corporations 
November  30,  1919  and  1920. 

Assets                               1919  1920 

Real  Estate $293,335  $481,015 

Machinery 204,738  254,799 

Merchandise 1,213,597  1,618,661 

Furniture  and  Fixtures 8,744 

Mortgage 6,500 

Cash  and  accounts  receivable 591,976  486,584 

Securities 166,198  248 

Deferred  assets 14,221  32,669 

$2,484,068  $2,889,224 
Liabilities 

Capital  Stock $500,000  $500,000 

Mortgages 10,000 

Floating  debt 863,000  1,545,000 

Accounts  payable 401,146  231,990 

Surplus 939,601  551,018 

Reserve 141,019  51,215 

$2,484,068  $2,889,224 

Questions 
1 .  What  essential  changes  have  occurred  between  the 
two  dates,  and  how  do  you  account  for  these  changes? 
Could  they  have  been  avoided? 


OPEN  MARKET  BORROWING  237 

2.  Should  you  expect  this  concern  to  be  able  to  sell 
any  paper  on  the  open  market  in  1921? 

3.  Should  you  expect  that  any  bank  would  rediscount 
loans  made  by  this  company  with  other  banks? 

4.  Assuming  that  the  major  part  of  the  floating 
debt  is  in  the  form  of  commercial  paper,  what  do  you 
expect  the  company's  financial  position  to  be  at  the 
middle  of  1921? 

5.  What  financial  advice  would  you  give  this  concern 
at  the  present  time? 


Problem  91 

Attempting  to  Renew  Relations  With  a 

Former  Note  Broker  in  19''21 

The  F.  Hardware  Manufacturing  Company  had 
formerly  been  a  customer  of  the  N.  Commercial  Paper 
House.  For  four  or  five  years,  however,  they  had  not 
raised  any  money  by  the  sale  of  notes,  though  this 
banking  house  had  from  time  to  time  made  non-com- 
mittal offers  of  service.  However,  the  F.  Company 
had  managed  to  finance  itself  almost  solely  through 
its  banks  and  did  not  appear  to  be  interested  in  trying 
the  commercial  paper  market.  The  moral  risk  of  the 
concern  was  excellent. 

In  June,  1921,  they  approached  the  commercial 
paper  house  for  a  loan,  presenting  the  following  state- 
ment of  condition  as  of  December  31,  1920: 


238 


PROBLEMS  IN  BUSINESS  FINANCE 


Assets 

Real  Estate $586,030 

Machinery 282,743 

Cash 142,516 

Accounts  receivable  480,262 

Investments 251,217 

Notes 6,873 

Merchandise 1,279,250 

Furniture,  fixtures  256,439 
Autos,  trucks, 

teams 9,641 

Patent  rights 5,461 

Prepaid  expenses.  9,470 
$3,309,902 


Liabilities 

Capital $569,100 

Accounts  payable.  378,992 

Notes  payable. . .  .  505,000 
Surplus  and 

reserves 1,845,995 

Accrued  items. ..  .  10,815 


$3,309,902 


The  trade  checkings  on  this  concern  were  found  to 
be  excellent,  and  their  commercial  bankers  considered 
them  A-1  in  every  respect. 

Questions 

1.  Should  the  F.  Hardware  Manufacturing  Com- 
pany have  expected  the  N.  Commercial  Paper  House 
to  buy  its  commercial  paper  at  this  time  with  the  con- 
dition indicated  on  the  statement? 

2.  As  the  credit  man  of  the  N.  Commercial  Paper 
House,  what  would  be  your  decision? 


OPEN  MARKET  BORROWING  239 

Problem  l)^ 
Seeking  a  New  Note  Broker  in  19(21 

The  Q.  Company  is  a  consolidation  of  several 
smaller  concerns  and  is  at  present  engaged  in  making 
miscellaneous  clothing  accessories,  particularly  sus- 
penders, garters,  and  the  like.  At  the  time  of  the 
consolidation  in  1915  their  chief  financial  adviser  was  a 
firm  of  private  bankers,  the  A.  Banking  Co.,  who  dealt 
in  some  investments  as  well  as  in  commercial  paper. 
In  fact,  these  bankers  were  well  represented  on  their 
board  of  directors. 

The  credit  of  the  new  company  was  from  every 
point  of  view  considered  excellent.  At  this  time 
also  a  commercial  paper  house,  the  B.  Banking  Co., 
which  had  frequently  sold  the  paper  of  one  of  the  im- 
portant consolidating  companies,  offered  its  services  to 
the  new  organization.  This  offer  was  from  time  to  time 
repeated  during  the  next  two  or  three  years,  but  on 
account  of  the  influence  of  the  group  of  bankers  back  of 
the  consolidation  the  offer  was  not  accepted. 

During  the  early  part  of  1921,  however,  the 

Company  began  to  put  out  feelers  with  a  view  to 
interesting  the  B.  Banking  Company  in  an  offer  of 
commercial  paper.  They  stated  that  while  the  A. 
Banking  Company  had  heretofore  taken  care  of  their 
commercial  paper  loans,  they  were  not  averse  to  finding 
out  what  terms  the  B.  Banking  Company  would  make 
them.  They  further  let  it  be  known  that  though  they 
had  been  in  the  past  and  still  were  borrowing  heavily 
from  their  bankers,  they  would  be  glad  to  have  their 
paper  sold  more  extensively  on  the  open  market. 

Accordingly,  the  B,  Banking  Company  looked  into 
the  situation.  They  found  it  difficult,  however,  to 
secure  a  financial  statement,  in  view  of  the  fact  that 
the  company  had  been  considered  very  prosperous  and 
had  been  dealing  solely  with  bankers  who  were  finan- 
cially interested  in  the  business.  Finally,  the  following 
statement  was  obtained  from  the  records  filed  with  the 
Commissioner  of  Corporations: 


240 


PROBLEMS  IN  BUSINESS  FINANCE 


Statement  of  the  Q.  Company 
Dec.  31,  1920 
Assets  Liabilities 

Real  Estate $1,462,165      Capital  Stock. .  .   $3,731,650 

Machinery 1,290,178      Mortgage none 

Furniture,  fixtures  Accounts  payable.        78,325 

&  merchandise.    1,978,152      Notes  payable.. .  .    1,011,000 

Notes 126,298      Subscriptions  to 

Accounts  receiv-  capital  stock . . .  9,337 

able 387,288      Reserves 773,843 

Cash. 204,267      Surplus 1,233,745 

Securities  and 

Investments...       267,124 
Patent  Rights ... .      283,986 

Trademarks 675,282 

Treasury  stock. .  .       106,550 
Development  ex- 
penses         56,610 

$6,837,900  $6,837,900 

Questions 

1.  From  your  analysis  of  the  balance  sheet  do  you 
think  that  this  concern  was  being  properly  managed? 

2.  What  should  you  expect  to  be  the  credit  rating  of 
this  concern  (a)  in  "the  trade,"  (6)  by  the  banks  with 
which  it  has  been  dealing? 

3.  On  what  basis  should  you  expect  the  second 
commercial  paper  house  to  form  its  decision? 

4.  Do  you  expect  that  this  company  was  able  to  sell 
its  paper  through  the  second  commercial  paper  house? 


OPEN  MARKET  BORROWING  241 

Problem  93 
Should  a  Concern  Finance  Itself  Largely 
Through  Note  Brokers? 

The  W.  Company  was  engaged  largely  in  the  manu- 
facture and  export  of  shoes  to  South  America.  Though 
the  company  had  lines  of  credit  with  two  banks  it  had 
grown  so  rapidly  during  the  war  years  that  these  lines, 
$50,000  at  each  bank,  were  wholly  out  of  proportion  to 
the  amount  of  business  done.  Further,  the  company  had 
been  depending  almost  solely  on  the  open  paper  market 
until  the  first  of  1920,  at  which  time  it  had  outstanding 
about  $500,000  in  notes,  with  an  average  maturity  of 
about  three  months. 

When  the  depression  came  in  the  South  American 
trade,  and  many  orders  began  to  be  cancelled,  the 
company  found  itself  pressed  to  meet  the  notes  coming 
due.  In  view  of  the  shrinkage  in  inventory  value,  and 
the  frozen  and  uncertain  condition  of  their  receivables, 
concerns  engaged  in  a  similar  line  of  industry  were 
unable  to  sell  paper  on  the  open  market.  Though  the 
W.  Company's  position  was  still  relatively  good,  the 
market,  due  partially  to  the  general  prejudice,  simply 
would  not  absorb  its  paper.  The  company,  therefore, 
resorted  to  its  banks  for  an  extension  of  credit.  How- 
ever, the  bank  lines  arranged,  based  on  the  condition 
of  two  or  three  years  earlier,  before  the  business  had 
become  so  widely  expanded,  were  not  more  than 
sufficient  to  take  care  of  one-fifth  of  the  open  market 
borrowings. 

As  the  moral  risk  of  the  management  of  the  concern 
was  wholly  satisfactory,  the  two  banks  felt  that  the 
financial  tie-up  was  due  as  much  to  the  general  business 
conditions  as  anything  else,  though  they  had  reason 
to  criticize  the  policy  of  their  customers,  who  had 
failed  to  keep  their  lines  sufficiently  large.  Notwith- 
standing, the}^  agreed  in  each  case  to  double  their  line 
of  credit  to  the  concern,  making  it  $100,000,  provided 
the  W.  Company  could  secure  in  addition  lines  of 
credit  to  an  equal  amount  from  three  other  banks. 
This  would  enable  the  concern  to  pay  off  its  open 


242  PROBLEMS  IN  BUSINESS  FINANCE 

market  borrowings.  The  additional  lines  of  credit 
were  finally  arranged  in  time  for  the  W.  Company  to 
pay  its  notes  at  maturity  and  continue  in  a  solvent 
condition. 

Questions 

1.  Was  the  W.  Company  justified  in  expecting  its 
banks  to  extend  further  credit  at  this  time? 

2.  What  light  does  the  problem  throw  on  the  rela- 
tions existing  between  open  market  borrowing  and 
bank  borrowing? 


Problem  94 

Conflict  of  Interests  Between  Open  Market 

Borrowing  and  Bank  Borrowing 

The  Company,  manufacturer  of  a  well- 
known  product  for  which  there  is  a  world-wide  market, 
has  nearly  always  depended  for  its  current  financing  on 
the  commercial  paper  market.  As  the  concern  has 
been  prosperous  there  has  always  been  a  ready  sale 
for  its  paper  and  only  stereotyped  questions  have  been 
asked  by  the  commercial  paper  houses.  The  concern  is 
unincorporated,  and  the  partners  were  supposed  to 
have  extensive  resources  outside  this  particular  busi- 
ness. Under  the  circumstances,  their  commercial 
paper  was  considered  ''gilt-edged." 

It  should  further  be  explained  that  this  company, 
while  never  borrowing  much  from  its  banks,  always 
arranged  for  large  lines  of  credit  and  always  maintained 
at  least  a  20  per  cent  cash  deposit  against  these  lines. 
Consequently  its  reputation  with  its  bankers  was  ex- 
cellent, and  this  excellent  reputation  increased  the 
eagerness  with  which  its  paper  was  bought  throughout 
the  country. 


OPEN  MARKET  BORROWING  243 

In  the  first  part  of  1921  rumors  came  that  the 
partners  of  the  concern  had  invested  their  outside 
resources  in  all  manner  of  questionable  undertakings 
which  had  now  either  failed  or  were  in  serious  financial 
difficulties.  A  few  days  before  this  time  a  well-known 
commercial  paper  house  had  bought  outright,  and 
sold  under  the  usual  options,  $200,000  worth  of  this 
firm's  paper.  The  concern  had  a  deposit  of  $40,000 
in  a  well-known  New  England  Trust  Company  which 
entitled  it  to  a  line  of  $200,000.  Only  $50,000,  how- 
ever, was  being  borrowed. 

When  the  company  endeavored  to  use  its  line  of 
credit  at  the  bank  more  extensively,  questions  were 
immediately  raised,  whereupon  the  precarious  con- 
dition of  the  concern  became  evident.  Fearing 
bankruptcy  proceedings  which  might  result  in  very 
extensive  loss,  the  bank  immediately  exercised  the  legal 
right  to  demand  60  days'  notice  before  the  with- 
drawal of  the  customer's  funds.  This  action  of  the 
bank  at  once  gave  them  an  80  per  cent   protection. 

The  action  of  the  bank  and  the  rumors  regarding  the 
solvency  of  the  partners  of  the  concern  immediately 
became  known,  through  the  usual  sources  of  infor- 
mation, to  the  banks  which  were  buying  the  latest 
issue  of  commercial  paper  on  option.  They  therefore 
returned  the  paper  to  the  note  brokers  who  had  just 
bought  it.  The  note  brokers,  therefore,  whose  function 
is  merely  that  of  a  go-between,  became  unsecured 
creditors  to  the  extent  of  $200,000. 

Question 
1.  What    light    does    this    problem    throw    on    the 
desirability  of  selling  paper  on  the  open  market  by  an 
unincorporated  concern, 

(a)  From  the  point  of  view  of  the  concern  itself. 
(h)  From  the  point  of  view  of  the  purchasers  of 
its  paper? 


244         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  95 

The  Nature  of  the  Business,  the  Business  Cycle, 

AND  THE  Note  Broker 

The  M.  Company  are  dealers  in  masons'  supplies. 
On  June  15,  1921  they  applied  to  a  commercial  paper 
house  for  as  large  a  loan  as  the  latter  would  be  willing 
to  grant.  They  presented  the  following  balance  sheet, 
as  of  December  31,  1920:— 

Assets  Liabilities 

Real  Estate $14,427      Capital $400,000 

Cash 20,485      Accounts  payable.      237,621 

Accounts  receiv-  Notes  payable. . . .      380,000 

able 498,348      Surplus 167,352 

Investments 10,892 

Notes 38,219 

Merchandise 516,391 

Furniture,  fixtures 

and  tools 26,816 

Autos,  etc 29,459 

Patent  rights 700 

Goodwill 20,000 

Patterns 1,000 

Miscellaneous. . .  8,231 

$1,184,973  $1,184,973 

Questions 

1.  What  is  your  analysis  of  the  balance  sheet 
furnished? 

2.  Should  the  company  in  June,  1921  expect  to  sell 
its  commercial  paper  on  the  strength  of  this  balance 
sheet? 

3.  Irrespective  of  general  business  conditions,  do 
you  think  that  a  concern  such  as  this  should  be  selHng 
its  paper  on  the  open  market? 

4.  As  the  investigator  for  the  commercial  paper  house 
what  further  information,  if  any,  should  you  call  for? 

5.  What  decision  do  you  expect  would  be  handed 
down  in  this  case? 


THE  TRADE  ACCEPTANCE  245 

C.    THE  USE  OF  THE  TRADE  ACCEPTANCE 

Problem  96 

Claims  Made  for  the  Trade  Acceptance  by  One  of 

Its  Chief  Advocates 

"Thousands  of  business  men  owe  the  present  hquid 
condition  of  their  concerns  to  the  use  of  this  form  of 
paper  (i.  e.  the  trade  accent; tonce),  whereas  abuse  has 
been  due  to  practices  of  the  individual  not  the  instru- 
ment. Within  the  past  three  years  the  best  minds  in 
the  business  and  banking  world  have  given  the  system 
a  most  thorough  study,  applying  the  acid  test  of  ex- 
perience and  finally  pronouncing  it  worthy  of  their 
approval.  The  principal  mission  of  the  trade  ac- 
ceptance is  to  liquefy  credit,  improve  the  turnover  and 
minimize  credit  losses.  To  maintain  its  place  as  a 
high  grade  credit  instrument  it  will  therefore  be  used 
with  the  best  class  of  current  accounts.  Where  goods 
have  previously  been  sold  on  open  account  basis 
and  the  credit  department  record  of  the  customer 
shows  that  his  account  is  usually  settled  with  due 
regard  for  the  credit  terms,  the  acceptance  is  used 
to  the  best  advantage. 

"It  is  a  matter  of  record  that  more  than  one-third 
of  commercial  failures  are  due  to  insufficient  working 
capital.  If  trade  acceptances  were  substituted  for 
open  accounts,  thus  enabling  the  merchant  to  dis- 
count them  at  his  bank,  thereby  providing  additional 
capital,  the  strain  would  unquestionably  be  relieved 
and  the  merchant  would  be  in  a  position  to  do  twice 
the  amount  of  business  possible  under  the  open  book 
method." 

Questions 

1.  Does  a  concern  derive  any  particular  advantage 
from  using  the  trade  acceptance  with  "the  best  class 
of  current  accounts?" 

2.  Do  you  agree  that  a  concern  using  the  trade 
acceptance  could  do  at  least  twice  as  much  business 
as  could  be  done  under  the  open  account  method? 


246  PROBLEMS  IN  BUSINESS  FIN    NCE 

3.  Would  the  discounting  of  trade  acceptances,  as 
suggested,  really  supply  more  working  capital  in  a 
business  which  lacks  it? 

4.  If  a  concern's  credit  is  already  good  at  the  bank 
and  it  is  borrowing  in  the  usual  commercial  way, 
would  a  good  bank  be  likely  to  discount  its  trade 
acceptances? 

5.  Would  it  be  wise  for  a  concern  which  is  already 
borrowing  to  the  limit  from  its  banks  to  discount  its 
trade  acceptances  in  other  quarters? 

G.  If  a  concern's  credit  is  such  that  the  banks  are 
not  interested  in  its  ordinary  commercial  account, 
would  its  credit  position  be  improved  by  changing  its 
open   accounts   to   trade   acceptances? 

7.  Granting  that  the  above  statement  is  true,  how 
would  the  universal  use  of  the  trade  acceptance  in  the 
manner  indicated  affect, 

(a)  The  price  of  commodities, 

(b)  The  general  credit  structure, 

(c)  The  number  of  commercial  failures? 


Problems  97 
What  Do  Figures  Prove? 

Early  in  1921,  Mr.  E.  W.  Shepard,  General  Credit 
Manager  of  the  Western  Electric  Company,  wrote 
substantially  as  follows,  regarding  their  experience 
with  the  trade  acceptance: 

"Early  in  1918  we  started  the  use  of  trade  acceptances. 
During  1919  and  1920  their  use  has  developed.     In 


THE  TRADE  ACCEPTANCE  247 

1919  both  the  number  and  volume  increased  over  200 
per  cent.  In  1920  the  number  and  volume  have 
increased  over  200  per  cent.  Our  losses  on  trade 
acceptances  for  the  first  two  years  were  much  smaller 
than  our  losses  on  open  account.  An  analysis  gives  us 
the  following  comparison: 


Per  cent  loss  to  sales 

Per  cent  loss  to  sales 

on  open  account 

on  trade  acceptances 

1918... 

0.39 

0.03 

1919... 

0.27 

0.07 

''Some  opponents  tell  us  that  trade  acceptances 
lengthen  terms,  but  when  used. properly  they  shorten 
terms  or  quicken  the  turnover,  and  most  users  have 
found  that  they  do.  Our  turnover  during  1919  was 
increased  15  per  cent,  and  this  year  our  average  turnover 
for  ten  months  has  been  nearly  12  per  cent  better 
than  during  the  same  time  in  1919,  notwithstand- 
ing conditions  of  the  last  four  or  five  months.  A 
considerable  part  of  this  improvement  is  due  to  the 
use  of  trade  acceptances.  The  real  credit  problems  at 
present  are:  1.  Increasing  failures.  2.  Slow  col- 
lections. The  first  means  increased  expense,  and  the 
second  means  increased  expense  in  carrying  the  accounts 
and  decreased  turnover.  In  finding  the  solution  of 
these  problems  don't  overlook  the  value  of  the  trade 
acceptance.  I  believe  the  credit  man  has  a  real 
opportunity  to  show  that  he  is  a  constructive  force  in 
the  industry.  Let  us,  therefore,  take  advantage  of 
this  instrument  which,  when  used  properly,  will  help 
us  in  accomplishing  better  results  than  in  the  past." 

Questions 

1.  Do  the  figures  above  given  "convince"  you  of  the 
value  of  trade  acceptance? 

2.  Should  you  expect  this  company  to  have  more  or 
less  favorable  experience  with  the  use  of  the  trade 
acceptance  than  would  a  smaller  concern?     Why? 

3.  Which  type  of  concern  should  you  expect  to 
reap  most  advantage  from  the  use  of  trade  acceptances, 
a  manufacturing  or  a  ''trading"  concern?     Why? 


218         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  98 
Trade  Acceptances  and  the  Rapid  Increase  of  Prices 

The  following  statement  was  made  in  1919  by  the 
president  of  a  medium-sized  concern  dealing  in  iron 
ore,  coal  and  coke: 

"It  was  during  the  beginning  of  the  great  ex- 
pansion of  business  that  we  adopted  the  trade 
acceptance.  Prices  of  iron  jumped  overnight  from 
approximately  $16  per  ton  to  almost  $50.  It  required 
three  times  as  much  capital  to  do  business  satisfac- 
torily during  the  war  as  it  required  to  do  business  before 
the  war.  Had  it  not  been  for  ample  and  generous 
banking  facilities — and  our  case  was  probably  typical 
of  thousands  of  other  business  houses — we  would 
have  found  our  own  cash  resources  quite  inadequate 
to  meet  the  situation.  As  it  was,  we  found  that  we 
had  in  open  book  accounts  four  or  five  times  as  much 
money  due  us  as  we  had  ever  had  due  us  at  any  time 
previously;  and  in  order  to  swing  our  trade  and  keep 
our  own  credit  good,  discounting  our  own  bills  and 
meeting  all  payments  on  their  due  dates,  we  were 
owing  banks,  not  a  sum  of  money  out  of  proportion 
to  the  money  due  us,  but  an  amount  which  was  much 
larger  than  our  capital,  and  which  four  or  five  years 
ago,  would  have  seemed  impossibly  large. 

"This  was  our  situation  when  we  adopted  the  trade 
acceptance.  The  results  were  absolutely  miraculous. 
In  less  than  four  months'  time  we  had  reduced  our 
open  book  accounts  to  a  comparatively  small  figure; 
we  had  paid  every  dollar  of  indebtedness  due  the  banks, 
and  more  than  that  we  were  carrying  a  large  cash 
balance,  and,  in  addition,  had  trade  acceptances  in  our 
safe  which  we  called  a  cash  reserve,  because  it  could  be 
instantly  converted  into  cash.  These  trade  acceptances 
ran  into  large  figures. 

"Now,  there  is  our  record.  That  is  what  the  trade 
acceptance  did  for  us." 


THE  TRADE  ACCEPTANCE  249 

Questions 

1.  Is  this  concern  really  in  a  strong  position? 

2.  If  so,  is  their  position  a  result  of  the  use  of  the 
trade  acceptance? 

3.  What  should  you  expect  their  experience  to  be  at 
present? 

4.  What  difficulties  might  confront  a  similar  concern 
beginning  the  use  of  the  trade  acceptance  at  present? 

5.  Would  a  manufacturer  of  steel  products  find  it 
easier  or  more  difficult  to  use  trade  acceptances  than  a 
distributor  of  raw  material  needed  by  the  manufacturer? 
Which  would  probably  gain  most  from  their  use? 


Problem  99 
Introducing  the  Use  of  the  Trade  Acceptance 
With  Concessions 

The Shoe   Company  never  had  enough 

working  capital  to  put  it  in  a  comfortable  financial 
position.  Further,  under  the  prevailing  open  account 
method  of  selling  to  customers,  their  collections  tended 
to  be  very  slow.  Several  years  ago  their  condition 
was  so  dubious  that  their  old  bank  refused  to  lend  them 
any  more  money  in  the  usual  way. 

Finally,  the  bank  agreed  to  lend  them  for  a  short 
time  on  their  best  accounts  receivable  up  to  about  80 
per  cent  of  the  face  value.  It  was  arranged,  how- 
ever, that  the  bank  should  collect  the  accounts  and 
that  the  company  in  the  meantime  should  work  out 
a   plan  for  more  speedy  collections. 


250  PROBLEMS  IN  BUSINESS  FINANCE 

At  last  the Shoe  Company  decided  to  give 

trade  acceptances  a  thorough  trial.  Their  chief  prob- 
lem, however,  was  to  persuade  their  customers  to 
accept  bills  drawn  on  them  in  this  way,  as  many  thought 
it  was  too  great  a  reflection  on  their  credit  standing. 
Accordingly,  as  an  inducement,  the  company  agreed  to 
disregard  the  usual  terms  of  sale,  2  per  cent  in  10  days, 
30  days  net,  so  that  the  time  for  payment  indicated 
on  the  acceptances  was  extended  15  days.  This  in- 
duced most  of  their  customers  to  give  acceptances, 
taking  advantage  of  the  delay  in  payment  and  still 
receiving  the  cash  discount.  In  about  a  year's  time 
nearly  three  quarters  of  the  company's  sales  were 
financed  by  the  use  of  trade  acceptances.  These 
were  readily  discounted  by  the  bank  and  the  threat- 
ened failure  of  the  company,  due  to  insufficient  work- 
ing capital,  is  said  to  have  been  permanently  averted. 

Questions 

1.  Should  these  concessions  have  been  made? 

2.  Should  the  bank  discount  acceptances  obtained 
in  this  way? 

3.  Should  the  company  continue  its  present  policy? 


Problem  100 
Using   the  Trade   Acceptance  as  an   Aid   to   Selling 

The Company,  wholesale  cloth  merchants, 

in  1920  were  very  eager  to  sell  their  goods  as  usual  to  a 
large  customer  in  New  York  City.  The  customer, 
already  having  suffered  a  good  deal  of  loss  on  inventory, 
having  his  assets  in  a  comparatively  frozen  condition, 
'notwithstanding   price  reductions,   protested  that  he 


THE  TRADE  ACCEPTANCE  251 

feared  that  he  could  not  pay  for  the  goods  at  the  usual 
time  and  hence  preferred  not  to  buy. 

The   Company,  however,  made  him  what 

seemed  to  be  a  very  fair  price,  suggesting  that  he 
could  give  a  three-months  "acceptance"  for  the  goods, 
and  that  if  he  should  be  unable  to  honor  it  at  the 
expiration  of  this  period,  they  would  gladly  renew  the 
acceptance  until  he  could  be  in  a  position  to  pay. 
Thus  the  company  hoped,  by  increasing  their  accounts 
receivable,  to  make  a  more  favorable  showing  with 
their  own  bank  when  they  wished  to  borrow.  They 
further  suppos  d  that  they  had  it  in  their  power  to  dis- 
count the  acceptance  at  once,  provided  they  needed 
cash.     So  the  deal  was  closed. 

In  a  short  time  the  company  found  that  its  bank^. 
were  not  in  a  position  to  make  further  loans  for  curren^ 
financing.     Consequrntly    an    attempt   was  made   t^. 
discount    this    acceptance    to    the    extent    of    abo   i. 
$100,000.     Upon  making  inquiry,  their  bank  disco 
ered  that  the  acceptor  would  probably  be  unable  - 
pay  his  obligations  when  due.     1  hus  a  tacit  agreeme 
for  continued  renewal  was  brought  to  light.     This, 
course,  made  the  acceptance  ineligible  for  rediscoun 
the  company's  banks  would  have  nothing  to  do  wit!^' 
the  matter,   and  it  became  necessary  to  resort  to 
finance  corporation,  which  bought  the  acceptance  at  ^ 
very  heavy  discount.   This   corporation   immediatel^ 
forced  payment  at  the  maturity  of  the  acceptance,  an^ 
so  brought  about  the  bankruptcy  of  the  company 
customer.  ^ 

Questions 

1.  Analyze  the  conditions  herein  presented. 

2.  What  light  does  this  problem  throw  on  the  use  of 
the  trade  acceptance, 

(a)  From  the  seller's  point  of  view; 
(h)  From  the  buyer's  point  of  view? 

3.  As  a  rule  should  a  concern  discount  the  trade 
acceptances  which  it  receives  from  its  customers  or 
hold  them  till  maturity?     Why? 


252  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  101 

Can  the  Open  Account  Prove  More  Satisfactory 

Than  the  Trade  Acceptance? 

An  electrical  supply  concern  finds  the  use  of  the 
trade  acceptance  a  poor  policy  with  poor  customers 
who  have  no  bank  accounts.  They  merely  buy  all 
they  can  and  put  off  the  time  of  payment  as  long  as 
possible  by  signing  trade  acceptances.  For  example, 
if  the  credit  extended  is  for  60  days,  they  will  have 
bought  at  least  two  months'  supply  before  the  first 
payment  comes  due,  and  very  probably  they  will  use 
their  credit  with  the  first  concern  in  order  to  establish 
credit  with  other  concerns,  the  result  being  that  they 
manage  to  secure  a  considerable  amount  of  goods  which 
they  proceed  to  sell  off  as  rapidly  as  possible,  so  that 
when  the  acceptances  come  due  there  is  practically 
nothing  to  attach,  and  payment  cannot  readily  be 
forced.  Further,  the  fact  that  they  have  no  bank 
accounts  makes  it  an  extremely  troublesome  process  to 
collect  from  them,  even  if  their  intentions  may  be  good. 

The Electrical  Supply  Company,  therefore, 

contends  that  with  an  open  account  it  can  manage  to 
get  a  little  money  from  time  to  time  without  running 
the  risk  of  waiting  a  long  time  for  the  initial  payment, 
which  almost  invariably  means  a  large  or  a  total  loss. 
Hence  this  company  expresses  itself  as  being  vigor- 
ously opposed  to  the  use  of  the  trade  acceptance. 

Questions 

1.  Is  the  difficulty  which  this  concern  encounters 
due  to  the  use  of  the  trade  acceptance? 

2.  What  advice  would  you  give  to  the  management 
in  the  matter? 


THE  TRADE  ACCEPTANCE  253 

Problem  102 

Under  What  Circumstances  Shall  the  Trade 

Acceptance  be  Adopted? 

A  wholesale  grocery  house  operating  under  the  usual 
conditions  in  an  Ohio  city  showed  the  following 
financial  condition  on  December  31,  1919: 

Statement  of   Company 

Dec.  31,  1919 
Assets  Liabilities 

Cash  on  hand. . .     $3,374.42      Accounts  Payable  S16,587.62 
Accounts  receiv-  Notes  payable. . .     95,000.00 

able 124,026.22      Other  liabiUties. . 

Notes  receivable.     10,893.91 
Merchandise    in- 
ventory    312,086.87 

Equipment  in- 
ventory        4,455.75 

Others    Assets — 

Real  Estate. .  .    124,191.67 

Bonds 2,484.00      Balance 569,425.22 

$581,512.84  $581,512.84 

Net  Sales $1,354,788.03 

Gross  Profit $160,507.84 

Credit  and  collection  expense $2,260.50 

Losses  from  bad  debts $2,938.30 

Total  Expense $124,012.31 

This  firm  does  business  with  about  1200  retail 
customers.  It  employs  eleven  salesmen  who  call  on 
the  customers  weekly.  These  salesmen  also  make 
collections.  A  number  of  the  customers,  however,  pay 
by  check,  and  take  cash  discounts  amounting  in  the 
aggregate  to  about  1  per  cent  of  the  annual  net  sales. 

An  advocate  of  the  trade  acceptance  endeavored  to 
persuade  the  management  of  this  concern  that  they 
should  use  trade  acceptances  with  all  of  their  customers 
who  were  not  taking  the  cash  discounts  offered.  It  was 
stated  among  other  things  that  such  a  practice  would 
reduce  collection  expenses  as  well  as  losses  from  bad 
debts.  An  officer  of  the  concern  has  now  asked  for 
advice  on  the  matter. 


254  PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Do  you  think  that  this  concern  should  adopt  the 
trade  acceptance?     Why,  or  why  not? 

2.  Indicate,  specifically,  under  what  conditions  you 
think  it  desirable  to  use  the  trade  acceptance? 


Problem  103 

The  Banker's  Point  of  View  on  the 

Trade  Acceptance 

"A  concern  taking  the  acceptances  of  its  customers 
will  be  using  its  credit  in  the  same  way  that  it  would  if 
it  took  its  note  to  a  bank  and  got  a  loan.  The  same 
questions  will  arise  regarding  the  concern's  credit 
standing.  Whether  it  discounts  its  notes  or  its 
customers'  acceptances — the  basic  security,  which 
briefly  is  the  ability  to  sell  and  collect  on  sales, 
remains  the  same. 

"The  experience  of  bankers  so  far  shows  that  the 
proof  of  the  responsibility  and  capability  of  the 
acceptor  of  a  trade  acceptance  is  obtained  for  the  most 
part  from  the  maker,  who  at  the  same  time  becomes 
the  indorser  when  he  presents  the  paper  for  rediscount. 
The  credit  manager,  then  wants  to  be  sure  that  the 
information  regarding  the  acceptor  is  correct,  even 
though  the  financial  standing  of  the  indorser  is  first 
class.  The  temptation,  investigation  indicates,  is 
for  the  maker  to  put  the  acceptor's  best  financial  foot 
forward  when  he  comes  to  the  bank  with  trade  ac- 
ceptance paper. 

"For  this  reason,  suggests  one  banker,  the  data  thus 
obtained  should  be  minutely  scrutinized.  The  indorser 
may  not  always  be  the  best  source  of  information 
because  unconsciously  at  least  he  may,  as  the  repre- 
sentative of  the  selling  house,  be  too  anxious  to  increase 


THE  TRADE  ACCEPTANCE  255 

sales  and  make  as  many  turnovers  as  possible.  'Second- 
hand' information  of  this  sort  might,  if  distorted  in 
any  way,  defeat  the  whole  purpose  of  trade  acceptances 
as  especially  desirable  two-name  paper  for  the  bank. 
Such  data  might  indeed  make  the  offering  of  security 
poorer  from  the  standpoint  of  dependability  than  a 
commercial  short-time  note." 

Question 
Do  you  agree  with  the  point  of  view  here  expressed? 


Problem  104 

Conflicting  Opinions  of  Bankers 

On  Trade  Acceptances 

A.  A  partner  in  one  of  the  largest  commercial 
paper  houses  in  the  country  recently  made  the  following 
statement  regarding  trade  acceptances: 

"Judging  by  the  experience  of  the  past  two  or  three 
years,  I  think  the  trade  acceptance  is  one  of  the  worst 
calamities  that  could  have  possibly  happened  in  the 
financial  world.  It  has  lead  to  inconceivable  abuses 
and  has  weakened  the  position  of  many  a  concern  which 
would  otherwise  have  been  strong.  While  there  may 
be  in  certain  instances,  something  to  be  said  in  its  favor, 
so  far  as  our  house  is  concerned  we  will  avoid  its  use 
to  the  uttermost  and  will  have  no  dealings  with  a 
company  which  gives  trade  acceptances." 

Question 
Why  should  a  commercial  paper  house  "feel"  this 
way  about  it? 


B.  A  well-known  banker  recently  said,  "The  use  of 
the  trade  acceptance  is  growing  rapidly.  It  has  been 
the  salvation  of  many  a  concern  which  during  the  past 


256         PROBLEMS  IN  BUSINESS  FINANCE 

two  years  without  its  use  would  certainly  have  gone  on 
the  financial  rocks." 

On  the  Same  day  that  this  statement  was  made,  an- 
other leading  banker  said,  "The  use  of  the  trade  ac- 
ceptance is  dying  out.  In  two  or  three  years  more 
no  one  will  give  them.  Personally,  I  wish  the  whole 
d business  were  dead  and  buried." 

Questions 

1.  Analyze  these  conflicting  statements  with  care. 

2.  Account  for  the  differences  of  opinion  expressed. 

3.  What  are  your  own  conclusions  on  the  matter? 


Problem  105 
Trade  Acceptances  and  the  Turnover  or  Inventory 

From  the  point  of  view  of  the  general  credit  situ- 
ation, should  you  consider  it  more  desirable  to  use 
trade  acceptances  in  the  various  stages  of  an  industry 
in  which  the  turnover  of  inventory  is  slow,  or  in  one 
in  which  the  turnover  is  comparatively  rapid?     Why? 


Problem  106 

General  Questions  on  the  Trade  Acceptance 

Questions 

1.  Can  you  formulate  any  rules  as  to  the  type  and 
size  of  business  concerns  which  can  most  profitably 
use  the  trade  acceptance  in  place  of  open  accounts? 

2.  Does  the  use  of  the  acceptance  depend  at  all 
upon  the  type  of  customers,  their  number,  or  the 
average  size  of  their  orders? 

3.  Specifically,  what  relation,  if  any,  does  the  use  of 
the  trade  acceptance  bear  to  the  Business  Cycle? 


WORKING  CAPITAL— MISCELLANEOUS      257 

4.  Summarize  the  advantages  and  disadvantages  of 
the  trade  acceptance : 

a.  From  the  point  of  view  of  the  drawer; 

b.  From  the  point  of  view  of  the  acceptor; 

c.  From  the  point  of  view  of  the  commercial 
banker ; 

d.  From  the  point  of  view  of  the  note  broker ; 

e.  From  the  point  of  view  of  the  general  credit 
situation. 


D.    MISCELLANEOUS  METHODS  OF  RAISING 
WORKING  CAPITAL 

Problem  107 
Conservatism  in  Securing  Working  Capital 

A  concern  manufacturing  a  large  line  of  articles 
marketed  all  over  the  country  through  jobbers, 
retailers,  and  direct  to  customers,  has  throughout  its 
histoiy  been  able  to  attain  its  desired  growth  by 
reinvesting  its  profits  above  a  normal  return  on  the 
investment.  Borrowing  has  usually  been  restricted  to 
a  small  per  cent  of  its  invested  capital  and  to  the  period 
in  each  year  when  its  inventory  was  at  the  highest. 
During  the  balance  of  the  year  the  concern  was  able 
to  build  up  its  cash,  which  at  the  lowest  inventory 
period  usually  about  equaled  its  borrowing.  Money 
was  borrowed  from  banks  on  promissory  notes. 

During  the  war  period,  rising  prices  and  increased 
business  led  to  a  large  increase  in  inventory  and  bills 
receivable.  The  company  found  itself  in  need  of  more 
funds  and  the  question  arose  as  to  whether  it  should 


258  PROBLEMS  IN  BUSINESS  FINANCE 

increase  its  capital  stock,  borrow  on  notes,  or  increase 
its  borrowings  from  its  banks.  The  possiblity  of 
using  trade  acceptances  was  scarcely  to  be  considered, 
since  this  company  sold  its  goods  at  30  days  net,  and 
the  terms  were  usually  strictly  observed. 

It  was  decided  not  to  increase  the  capitalization  for 
the  following  reasons:  (1)  It  was  not  thought  that 
the  need  of  more  funds  was  a  permanent  need  such  as 
would  not  be  overcome  by  falling  prices  and  gradual 
accumulation  of  reinvested  profits.  (2)  Any  increase 
in  capitalization  would  necessarily  be  at  a  high  rate 
of  interest,  which  would  permanently  increase  the 
company's  fixed  charges,  or  at  a  high  rate  of  dividend. 

Selling  its  notes  through  commercial  paper  houses  was 
rejected,  first,  on  account  of  the  old  fashioned  but 
conservative  objection  to  having  the  company's  paper 
sold  generally  throughout  the  country.  This  would  be 
poor  financial  advertising,  in  some  people's  minds. 
This  plan  was  further  opposed  because  of  the  difficulty 
and  high  cost  of  issuing  notes  at  the  time  when  funds 
were  needed.  Finally,  it  was  felt  that  concerns  who 
usually  borrow  on  the  open  market  are  frequently 
unable  to  get  sufficient  funds,  and  c:n,  in  case  of 
real  need,  only  with  difficulty  obtain  additional  help 
from  their  banks,  whose  funds  are  being  conserved  for 
their  old  customers. 

The  question  of  changing  some  of  the  slower  open 
accounts  to  the  trade  acceptance  basis  was  casually 
mentioned,  but  it  was  felt  that  the  company's  credit  at 
the  banks  might  be  injured  if  they  should  attempt  to 
discount  their  two-name  paper. 

Questions 

1.  Do  you  think  that  this  company  considered  all 
the  desirable  alternatives  for  the  financing  indicated? 
If  not,  what  further  methods  can  you  su^  gest  as  reason- 
able possibilities? 

2.  (a)  Do  you  agree  with  the  conclusions  reached 
regarding  certain  specific  methods  of  financing  as  given 
above? 


WORKING  CAPITAI^MISCELLANEOUS      259 

(6)  Do  you  agree  with  the  specific  reasons  given  for 
arriving  at  these  conclusions? 

3.  What  method  or  methods  of  raising  the  additional 
working  capital  would  you  have  advised  this  concern 
to  follow? 

4.  W^hat  method  do  you  believe  the  company  actually 
adopted,  and  what  should  you  expect  to  be  the  results? 


Problem  108 
Getting  Credit  from  the  Supply  House 

John  Black,  a  dry-goods  salesman,  decided  to  put 
ten  thousand  dollars  into  a  dry-goods  business.  After 
he  had  selected  his  location,  the  first  problem  was  the 
purchase  of  fixtures.  Next  he  was  obliged  to  place  a 
limit  upon  the  credit  he  would  extend  to  customers. 
This  was  a  vital  problem,  and  one  that  would  affect  the 
credit  standing  of  his  store.  Deducting  the  amount 
tied  up  indefinitely  in  fixtures  and  in  customers' 
credits,  he  had  left  a  working  capital  of  six  thousand 
dollars.  On  this  capital  he  should  be  able  to  secure 
four  thousand  dollars'  credit  from  his  supply  house. 
This  would  enable  him  to  carry  ten  thousand  dollars' 
stock.  As  he  could  turn  it  three  times  a  year,  he  was  in 
a  position  to  do  an  annual  business  of  thirty  thousand 
dollars. 

His  expenses  were  not  to  be  more  than  twenty  per 
cent  of  the  total  sales — six  thousand  dollars  per  annum, 
or  one  thousand  dollars  every  sixty  days.  His  bills 
fell  due  in  sixty  days.  On  the  basis  outlined  his 
business  was  conducted  thus: 


2t)0  TKOBLEMS  IN  BUSINEI^S  FINANCE 

Original  cash  capital.$10,000      Stock  carried $10,000 

Fixtures 2,000      Sales  for  year 30,000 

S8,000      Sales  every  sixty  days     5,000 
Customer's  accounts.     2^000      Deduct  expenses  and 

personal  withdraw- 
als for  sixty  days. .      1,000 


$6,000 
Credit  from  jobbers .   $4,000      Ca^h,\"nci'udTng"prof 


its,    to    apply    to 
accts.  payable ....     4,000 
(which  last  entry  proves  up 
with    the    item,    "Credit 
from  jobbers.") 

John  Black  was  able  to  establish  a  successful  business. 

He  planned  not  only  to  put  his  business  on  a  sound 
basis,  but  he  considered  also  his  credit  standing.  He 
limited  his  outlay  for  fixtures;  he  limited  the  amount 
of  his  accounts  receivable;  he  planned  his  business  and 
took  collection  precautions;  so  that  he  could  meet  his 
notes  when  due ;  he  accepted  an  amount  of  credit  well 
proportioned  to  his  working  capital. 

(A.  W.  Shaw  Company,  Hoic  to  Finance  a  Business,  30-31.) 

Questions 

1.  Do  you  see  any  weakness  in  this  plan? 

2.  Would  it  have  been  better  for  Black  to  borrow 
from  the  local  bank? 

3.  Was  it  wise  for  him  to  carry  so  large  an  amount  of 
stock? 

4.  Should  you  advise  him  to  continue  to  finance 
himself  in  this  way? 


WORKING  CAPITAL— MISCELLANEOUS      261 

Problem  109 
Business  Borrowing  on  Personal  ('ollateral 

The  Unit  Company,  a  concern  making  important 
machine  accessories,  is  solely  a  one-man  concern  and 
unincorporated.  During  the  war  years  it  was  extra- 
ordinarily successful  and  secured  heavy  loans  from  one 
bank.  As  its  business  dropped  off  heavily  in  1920,  not 
only  was  it  impossible  to  pay  off  this  loan,  but  in  order 
to  avoid  failure  additional  bank  loans  were  needed. 

The  bank  was  finally  on  the  point  of  forcing  the 
concern  into  liquidation  with  a  view  to  salvaging  a  part 
of  the  loan,  as  it  seemed  improbable  that  the  concern 
would  be  able  to  work  its  way  out.  The  manager  and 
sole  owner,  however,  was  a  large  holder  of  good  securi- 
ties, which  he  agreed  to  pledge  with  an  officer  of  the 
bank,  not  as  collateral  for  his  loan,  but  as  a  guarantee 
to  the  bank  which  would  protect  them  against  any  loss. 
He  did  not  wish  the  word  to  go  out  that  he  had  been 
reduced  to  the  extent  of  borrowing  on  collateral. 
The  amount  of  securities  thus  voluntarily  handed  over 
by  him,  according  to  the  banker's  statement,  was 
several  times  the  extent  of  the  bank's  loan.  The 
bank  on  its  part,  also,  has  attemped  to  conceal  the 
details  of  this  transaction. 

Question 
1.  From  the  point  of  view  of  the  borrowing  concern, 
what  appear  to  be  the  elements  of  strength  or  weakness 
in  the  policy  followed  by  the  owner  of  this  business? 


202         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  110* 
Pledging  Receivables 

Mr.  B,  a  dealer  in  automobile  supplies  and  accesso- 
ries, had  enough  capital  of  his  own  to  start  his  business. 
As  his  trade  expanded,  however,  he  found  that  he  did 
not  have  sufficient  working  capital  to  finance  the 
expansion    and    to    buy    under    the    most    favorable 

*The  following  account  of  the  practices  regarding  the  pledging  of 
receivables  by  different  types  of  concerns  should  prove  valuable: 

(1)  Assigning  of  accounts  by  concerns  that  are  financially  involved. 
Suppose  a  certain  business,  which  has  $10,000  of  accounts  receivable, 

is  in  financial  straits  and  must  have  immediately,  saj',  $5,000  in  cash. 
Unable  to  borrow  on  its  own  note,  having  neither  customers'  notes 
nor  trade  acceptances  available  for  discount  at  a  commercial  bank,  it 
still  has  in  its  accounts  receivable  a  resource  which  can  be  converted 
into  cash  through  the  intermediation  of  a  discount  house.  By  pur- 
chasing these  accounts  at  a  substantial  discount  and  collecting  them 
in  full  at  maturity,  the  discount  company  can  at  once  provide  the 
necessary  financial  assistance  to  the  enterprise  in  question  and  earn 
a  profit  for  itself.  The  discount  company  receives  the  funds  which  it 
advances,  partly  from  its  shareholders,  but  more  largely  from  the 
commercial  bank  from  which  it  borrows  on  its  promissory  note,  secured 
by  the  purchased  accounts  as  collateral.  The  amount  of  the  discount 
varies  somewhat,  but  in  the  nature  of  the  case  the  rates  are  very  high, 
usually  ruinously  so. 

(2)  The  sale  of  accounts  by  "well-rated"  concerns  as  a  means  of 
increasing  working  capital. 

In  periods  of  very  active  business,  particularly,  many  concerns  find 
that  after  having  utiUzed  the  full  line  of  credit  extended  them  by  the 
commercial  banks,  they  could  make  a  profitable  use  of  more  funds. 
Indeed,  even  before  the  maximum  line  of  credit  at  the  bank  has  been 
utilized,  a  concern  often  resorts  to  the  sale  of  receivables  in  order  to 
keep  some  of  its  bank  credit  available  for  an  emergency.  The  money 
borrowed  may  be  devoted  to  expanding  the  volume  of  business  through 
the  purchase  of  additional  raw  materials  or  merchandise,  or  it  may 
be  used  to  pay  off  trade  bills,  thereby  saving  the  discount  that  is 
ofTered  for  early  cash  payments.  While  rates  charged  for  such  funds 
are  high,  the  cost  is  usually  less  than  the  amount  of  the  cash  discount 
on  trade  bills,  which  can  thus  be  saved. 

The  character  of  the  business  concerns  which  make  use  of  such 
credit  sources  may  be  seen  from  the  fact  that  one  discount  house  in 
1918  made  773^%  of  its  $55,000,000  of  loans  to  customers  whose 
commercial  ratings  were  of  the  first  or  second  classes.  Nearly  75% 
of  the  customers,  moreover,  were  concerns  rated  above  $35,000,  some 
of  them  at  more  than  $1,000,000,  the  average  size  being  between 
$50,000  and  $75,000.  It  should  be  clearly  understood,  however,  that 
while  the  concerns  which  borrow  in  this  way  may  typically  be  well 
rated,  and  of  fair  size,  a  resort  to  the  sale  of  accounts  receivable  as  a 
means  of  raising  fimds  indicates  a  credit  condition,  temporarily,  such 
that  commercial  banks  are  unwilling  to  lend  them  more.  Concretely, 
the  concern's  ratio  of  quick  assets  to  current  liabilities  is,  as  a  rule, 
considerably  less  than  what  is  customarily  insisted  upon  by  the  com- 
mercial bankers. 


WORKING  CAPITAL— MISCELLANEOUS      263 

conditions.  At  first  he  made  arrangements  to  borrow 
from  a  local  bank  on  his  promissory  notes,  endorsed  by 
his  wife,  who  owned  a  small  amount  of  real  estate. 
These  notes  ran  for  three  months,  and  in  accordance 
with  the  agreement  made  with  the  bank  it  was  neces- 
sary for  him  to  pay  off  the  greater  portion  of  the  loan 
by  the  end  of  that  time.  It  was  his  practice,  however, 
to  renew  these  notes  at  the  end  of  the  three  months,  so 
that  he  was  a  continuous  borrower  from  the  bank. 

The  business  prospered,  but  with  its  growth  there 
was  a  constant  need  for  more  working  capital,  since  the 
original  investment  had  been  entirely  too  small.  The 
bank  thereupon  made  arrangements  to  lend  more 
heavily  on  condition  that  the  best  accounts  receivable 
should  be  pledged  and  turned  over  to  them  for  collec- 
tion. ThCvSe  served  as  collateral  for  B's  borrowings, 
until  ultimately  about  three-fourths  of  his  accounts 
receivable  were  really  in  the  hands  of  the  bank. 
Directions  had  been  issued  to  his  customers  that  they 
should  pay  month  by  month  at  the  bank,  but  to  the 
credit  of  the  account  of  the  business.  Though  the 
rate  charged  by  the  bank  on  this  loan,  being  a  month- 
ly rate,  was  much  higher  than  the  usual  discount  rate, 
the  borrower  found  it  possible  to  "clean  up"  his  loans 
frequently,  until  finally  he  reached  a  position  in  which 
it  was  no  longer  necessary  for  him  to  borrow  except 
when  his  business  was  at  the  peak. 

Recently,  B,  whose  business  is  now  on  a  firm  footing, 
wishing  to  erect  a  new  building  in  order  to  expand  his 
business  further,  tried  to  negotiate  a  loan  with  the 
bank  whereby  a  portion  of  the  necessary  funds  might 

The  high-grade  credit  companies  engaged  in  such  financing  opera- 
tions sometimes  discount  the  accounts  receivable,  but  more  commonlj' 
they  make  a  "service  charge"  instead.  For  instance,  one  large  com- 
mercial credit  company  advances  about  80%  of  the  face  value  of  each 
account  at  the  time  of  purchase,  and  the  balance  as  it  is  collected.  It 
derives  its  profits  by  a  gross  charge  of  1/25  of  1%  on  the  net  face  of 
accounts  for  each  day  or  a  little  over  1%  per  month,  plus  $5  per  $1,000 
on  the  first  $100,000  worth  of  purchases  from  any  concern  in  any  one 
year.  In  order  that  the  customers  of  a  concern  may  not  bs  disturbed, 
an  arrangement  is  made  whereby  the  borrower  may  do  his  own  col- 
lecting; thus  the  customers  need  not  know  that  their  accounts  have 
been  sold.  This  is  known  as  the  "non-notification"  plan.  (Moulton, 
in  Journal  of  Political  Economy,  Dec.  1920.) 


261         PROBLEMS  IN  BUSINESS  FINANCE 

be  raised  by  a  mortgage.  However,  his  old  bank,  with 
which  he  had  done  business  for  many  years,  refused  to 
make  the  loan. 

Questioiis 

1.  Analyze  the  strength  or  weakness  of  this  method 
of  financing,  taking  into  consideration  the  point  of 
view  of  the  bank  as  well  as  that  of  the  business. 

2.  Was  the  bank  justified  in  refusing  the  loan  for 
plajit  expansion? 

3.  How  would  "pledging  the  receivables"  of  a 
stationary  or  declining  concern  differ  from  the  present 
problem? 

4.  Would  your  answer  be  the  same  if  the  receivables 
were  to  be  sold  to  a  "discount"  company  instead  of  to 
a  commercial  bank?     Why,  or  why  not? 


Problem  111 

Securing  Working  Capital  Throi  gh  the  Issue 

OF  Notes  Secured  by  Inventory 

In  February,  1921,  the  Copper  Export  Association, 
composed  of  a  number  of  the  largest  copper  companies 
in  the  United  States,  issued  $40,000,000  of  8  per  cent 
secured  gold  notes  maturing  in  one,  two,  three  and 
four  years  from  February  15,  1921.  The  security 
back  of  these  notes  was  400,000,000  pounds  of  re- 
fined copper  held  for  export,  and  the  sums  required 
for  the  payment  of  principal  and  interest  were  guar- 
anteed by  seventeen  copper  producing  companies, 
members  of  the  Copper  Export  Association. 

As  both  the  foreign  and  the  domestic  demand  for 
copper  was  very  much  below  normal  at  the  time,  and  as 


WORKING  CAPITAL— MISCELLANEOUS      265 

it  was  uncertain  when  the  export  companies  would  be 
able  to  liquidate  their  inventory,  the  purpose  of  this 
issue  was  to  relieve  the  banks  of  their  heavy  export 
loans  and  put  the  companies  in  such  a  position  that 
they  would  be  free  from  immediate  worries  regarding 
their  current  financial  position. 

A  good  deal  of  satisfaction  was  expressed  in  financial 
circles  at  the  "discovery"  of  this  new  method  of 
financing,  based  on  the  security  of  a  commodity. 
During  the  next  few  months  there  was  talk  of  raising 
funds  in  the  same  way  to  finance  cotton  merchants 
who  found  themselves  with  a  large  amount  of  de- 
preciated inventory  on  their  hands,  which  they  had 
expected  to  export.  There  has  also  been  talk  of  creat- 
ing a  farmers'  export  association  with  a  view  to  financ- 
ing the  export  of  those  farm  products,  particularly 
grain,  which  have  for  some  time  been  held  in  exces- 
sive quantities  in  this  country. 

Questions 

1.  Do  you  consider  this  method  of  financing  for 
working  capital  sound? 

2.  Would  you  make  any  distinction  in  your  answer 
between  this  method  of  financing  as  applied  to  exports 
of  copper,  and  the  financing  of  cotton  or  farm  products 
in  a  similar  manner? 

3.  Should  you  approve  of  this  method  of  financing 
if,  as  farmers  have  wished,  the  purpose  would  be  to 
enable  the  holder  of  such  commodities  in  this  country 
to  avoid  selling  inventory  produced  at  a  high  cost,  at 
the  prevailing  low  prices? 

4.  Would  your  answer  be  the  same  if  the  commodity 
to  be  financed  were  a  manufactured  article? 

5.  What  important  effects,  if  any,  should  you 
expect  this  export  financing  to  have  on  the  finances  of 
the  export  companies? 

6.  What  seem  to  you  to  be  the  essential  differences 
between  borrowing  on  notes  secured  by  inventory  and 
"pledging  receivables"?  Which  do  you  consider  the 
safer  method  of  borrowing? 


266         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  11 '-2 
A  Distress  Method  of  Raising  Working  Capital 

The  X.  Paper  Box  Company  prided  itself  on  its 
ability  to  please  its  customers.  Being  a  small  concern 
it  would  make  up  special  orders  of  all  sorts  on 
demand,  and  would  frequently  use  a  special  quality  of 
cardboard  selected  by  its  clients.  One  of  the  large 
clients  had  formed  the  habit  of  buying  his  own  card- 
board and  selling  it  at  cost  to  the  X.  Paper  Box  Com- 
pany, which  thereupon  would  make  up  the  material 
according  to  specifications.  Early  in  1921,  when 
business  was  very  bad,  this  client,  whose  business  had 
very  markedly  fallen  off  so  that  he  required  few  boxes, 
sent  to  the  box  company  $20,000  worth  of  cardboard 
which  he  had  purchased  several  months  before,  when  it 
appeared  that  business  in  this  particular  line  would 
continue  active.  The  client,  already  in  serious  finan- 
cial difficulties,  though  at  present  very  little  indebted 
to  the  box  company,  asked  the  latter  to  pay  cash  for 
this  shipment  of  cardboard  from  which  the  future 
orders  of  boxes  would  be  made.  This  was,  of  course,  a 
method  of  getting  some  ready  money  from  the  box 
manufacturer,  who  already  had  on  his  hands  more 
inventory  than  he  knew  what  to  do  with. 

Question 
Under  the  circumstances,  what  policy  should  the 
box  manufacturer  follow  in  dealing  with  this  customer? 


WORKING  CAPITAI^MISCELLANEOUS       267 

PuOBLEiM     11, '5 

How  Can  a  Successful  Woolen  Firm  Improve 
Its  (Credit  Position  in  19'-21? 

The  Old  Company  is  a  firm  of  wool  merchants 
practically  owned  by  one  elderly  partner,  all  of  whose 
resources  are  in  the  business.  Its  financial  position  on 
January  1,  1921,  was  as  follows: 

Statement  of  the  Old  Co. 
January  1,  1921 
Assets  Liabilities 

Cash .1365,000      Notes  payable  (to 

Accounts  rec 89,000  banks) $900,000 

Merchandise    (ac-  Notes  payable  (to 

tual  value) 343,000  officers) 124,000 

Merchandise  con-  Accounts  payable.  2,000 

signed 193,000*    Surplus 1,285,000 

Liberty  bonds....      316,000 
Other  securities .  .       834,000 

Rest  Estate 164,000 

Miscellaneous. . .  17,000  

$2,311,000  .12,311,000 

(*This  item  really  covers  notes  receivable  from  wool  growers 
whom  the  merchants  are  financing  and  whose  clip  is  consigned  to  them.) 

This  firm  of  merchants  has  now  (June,  1921)  used 
up  the  greater  part  of  its  cash  in  financing  this  year's 
crop  of  wool  and  it  has  been  unable  to  reduce  its  bank 
loans.  The  banks  recently  have  been  much  disturbed 
by  the  condition  of  the  business,-  as  indicated  by  the 
statement  above  given,  as  well  as  because  of  the 
general  depression  in  the  industry,  and  are  debating 
whether  they  shall  refuse  to  renew  the  loans  now 
outstanding. 

Questions 

1.  As  indicated  by  the  above  statement,  is  this  a 
"bankable"  proposition? 

2.  In  order  to  put  themselves  into  a  more  satis- 
factory financial  position  (a)  immediately  (b)  ulti- 
mately, what  steps  should  you  advise  this  concern  to 
take? 


268         PROBLEMS  IN  BUSINESS  FINANCE 

Pkoblem   114 

Recently  Developed  Methods  of  Securing 

Working  Capital 

Since  the  conclusion  of  the  World  W^ar,  numerous 
methods  have  been  suggested  or  actually  put  into 
operation  in  this  country  for  financing  the  sale  of  goods 
to  European  manufacturers  who  would  apparently  be 
induced  to  buy  in  much  greater  quantity  or  who  would 
apparently  reap  a  considerable  gain  if  they  could 
postpone  payments  until  business  comes  back  to  normal. 
One  important  consideration,  from  the  point  of  view 
of  the  European  purchasers,  has  of  course  been  the 
unfavorable  exchange  rates  with  this  country,  so  far  as 
they  are  concerned.  This  exchange  condition  is  due 
partially  to  the  depreciated  currencies  of  foreign 
countries  and  partially  to  the  huge  public  and  private 
loans  which  have  been  made  to  them  by  this  country, 
as  well  as  to  the  fact  that  they  have  in  recent  years 
found  it  necessary  to  import  our  goods  more  heavily 
than  ever  before.  Such  a  condition  naturally  makes 
it  necessary,  provided  they  finance  their  purchases 
on  a  cash  or  short-time  credit  basis,  to  pay  the 
added  cost  resulting  from  their  depreciated  exchange, 
in  addition  to  the  relatively  high  prices  which  are 
charged  by  the  American  producer.  So  far  as  the 
American  exporter  is  concerned,  he  argues  that  an 
important  part  of  his  market  will  be  unavoidably  lost 
unless  hitherto  unusual  steps  are  taken  to  enable  the 
foreigner  to  purchase  his  goods. 

As  a  result  of  this  situation,  various  foreign  finance 
corporations  have  been  organized  in  this  country  by 
mercantile  and  banking  interests,  with  a  view  to  making 
possible  the  extension  of  much  longer  credits  than  have 
heretofore  been  customary  among  our  exporters.  The 
United  States  Government,  also,  passed  the  Edge  Act 
at  the  end  of  1919,  providing  for  the  creation  of 
special  banking  houses  for  foreign  trade  purposes,  the 
capital  of  which  may  be  subscribed  to  by  national 
banks,  and  which  are  under  the  supervision  of  the  Fed- 
eral Reserve  Board. 


WORKING  CAPITAL— MISCELLANEOUS      269 

Much  pressure  has  also  been  brought  to  bear  on  the 
Federal  Government  to  make  loans  direct  to  the 
producers  in  this  country,  so  that  they  can  finance 
themselves  while  selling  to  foreign  users  of  their  goods 
under  a  long-time  credit  arrangement  which  would 
make  it  impossible  for  ordinary  commercial  banks  to 
extend  their  assistance. 

Recently,  in  connection  with  the  League  of  Nations, 
a  plan  has  been  suggested  by  a  Dutch  banker,  named 
after  him  the  ter  Meulen  plan,  whereby  it  might  be 
possible  for  those  needing  imported  goods,  provided 
they  can  satisfy  an  international  committee  that  their 
credit  is  sound,  to  receive  from  their  respective  govern- 
ments national  bonds,  presumably  secured  by  collateral 
satisfactory  to  the  issuing  government.  These  bonds 
would  be  due  at  a  future  time,  not  at  all  related  to  the 
time  needed  for  effecting  the  transaction  or  for  trans- 
ferring the  imported  goods.  The  exporter  would  then 
receive  these  bonds  as  payment,  and  could  either  hold 
them  until  maturity,  or  no  doubt  sell  them  on  the 
open  market. 

Questions 

1.  Viewed  as  a  general  proposition,  do  you  consider 
such  methods  of  financing  the  sale  of  our  goods  abroad 
financially  sound? 

2.  How  should  you  expect  the  financial  position  of 
our  industries  to  be  affected  in  the  long  run  if  these 
methods  were  generally  used? 

3.  How  should  you  expect  the  finances  of  foreign 
industries  using  our  goods  to  be  affected? 

4.  How  should  you  expect  the  general  price  level  to 
be  affected  by  these  methods? 

5.  Should  you  approve  of  any  method  of  financing 
which  would  enable  producers  to  hold  their  merchandise 
inventory  in  the  hope  of  keeping  up  prices  when  the 
general  trend  of  prices  is  downward? 

6.  Would  your  answer  be  different  if  the  capital  for 
this  sort  of  financing  were  to  be  furnished  by  the 
Government? 


270         PROBLEMS  IN  BUSINESS  FINANCE 

Pir>BLEM     11.) 

Shall  a  Conckkn  Whosp:  Financial  Standinc;  Has  Hkkn 

Excellent  Sp:ll  New  Securities  at  a  High  Rate  in 

Ordeh  to  Improve  Its  Ctrrent   Position? 

The Company,  engaged  in  the  making  of 

steel  products,  has  been  excellently  managed.  Its 
growth  has  been  continuous  but  not  spectacular.  The 
company  has  for  many  years  made  high  profits,  until 
by  the  end  of  1920  it  had  a  surplus  equal  to  about  60 
per  cent  of  all  the  capital  stock  outstanding.  During 
the  year  1920,  after  the  payment  of  dividends  on  pre- 
ferred and  common  stock,  there  was  added  to  surplus 
an  amount  equal  to  about  1 1  per  cent  on  the  common 
stock.  In  fact,  18  per  cent  had  been  earned  on  the 
common  stock,  and  in  addition  a  considerable  amount 
of  bonds  had  been  retired  out  of  earnings.  Liberal 
allowance  had  also  been  made  for  depreciation  and  for 
tax  reserves.  The  net  worth  of  this  company  on 
December  31,  1920,  was  equal  to  160  per  cent  of  the 
par  value  of  the  stock. 

During  the  early  months  of  1921  the  company 
suffered  a  decline  in  business  because  of  the  general 
depression.  Within  the  first  six  months  of  the  year  it 
probably  did  not  operate  at  more  than  one-third  its  full 
capacity.  But  it  turns  out  a  very  wide  variety  of 
products  and  its  market  was  one  of  the  last  to  decline 
and  will  be  one  of  the  first  to  improve.  The  president 
of  the  company  now  thinks  (July,  1921)  that  they  will 
be  operating  at  about  two-thirds'  capacity  by  autumn. 

On  account  of  the  small  v^olume  of  business  done, 
the  company  naturally  operated  at  a  deficit  during  the 
first  half  of  1921,  for  in  accordance  with  earlier  ex- 
perience it  would  have  been  necessary  for  the  plant  to 
operate  to  about  75  per  cent  capacity  in  order  to  break 
even.  Every  effort,  however,  has  been  made  to  reduce 
overhead  expenses  and  effect  economies  until  it  is  now 
believed  that  the  company  can  avoid  a  deficit  if  the 
plant  is  operated  to  60  per  cent  capacity. 

Due  to  the  generally  unliquid  business  conditions 
this  company  unavoidably  has  a  high   merchandise 


WORKING  CAPITAL— MISCELLANEOUS      271 

inventory,  which,  to  be  sure,  has  been  written  down  to 
market.  Its  bank  borrowings  are  also  higher  than  they 
have  ever  been  before,  though  not  in  excess.  The 
current  ratio  was  at  the  beginning  of  the  year  about 
2.4  to  1.  This  ratio  has  naturally  been  reduced  since 
that  time,  but  is  still  a  very  good  one  considering 
business  conditions. 

The  management  of  this  concern,  not  being  used  to 
reporting  deficits  to  stockholders  and  desiring  to  main- 
tain the  financial  independence  of  the  company,  is 
wondering  whether  it  would  be  a  good  plan  to  do  some 
financing  in  the  near  future,  so  that  it  would  not  be 
necessary  to  secure  from  the  banks  constant  renewals 
of  notes  payable. 

The  bank  lines  are  still  more  than  sufficient  to  take 
care  of  all  present  borrowings,  but  the  president  feels 
that  since  the  financial  showing  for  1921  will  be 
decidedly  subnormal,  it  will  probably  be  extremely 
difficult  to  do  any  new  financing  in  the  following  year, 
if  that  should  become  necessary. 

With  investment  conditions  such  as  they  are  at  the 
present  time,  it  would  probably  be  impossible  for  the 
company,  in  spite  of  its  excellent  record,  to  secure  any 
new  funds  except  through  an  issue  of  bonds.  This  would 
introduce  a  new  difficulty  into  the  situation,  since  there 
is  already  outstanding  an  issue  of  5  per  cent  first  mort- 
gage bonds  on  the  fixed  assets  of  the  company.  The 
management,  therefore,  feels  that  it  would  be  difficult  at 
the  present  time  to  float  a  new  bond  issue  junior  to 
this  issue.  At  any  rate,  if  this  were  done,  the  charges 
would  be  almost  prohibitively  high. 

Hence  the  question  arises  as  to  whether  it  would 
be  good  policy  to  attempt  to  sell  new  bonds  to  provide 
for  the  needed  working  capital,  and  to  retire  the  pres- 
ent bond  issue.  At  this  point  another  complication 
is  raised  inasmuch  as  the  entire  present  bond  issue  is 
held  as  an  investment  by  another  company.  This  com- 
pany refuses  to  sell  these  bonds  back  to  the  subject  com- 
pany except  at  par,  though  if  they  were  on  the  market 
they  would  be  selling  at  a  much  lower  figure. 


272  PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  In  the  light  of  the  facts  given,  do  you  think  it  is 
wise  for  this  company  to  attempt  any  new  financing  of 
any  sort  at  the  present  time? 

2.  If  there  is  to  be  new  financing,  should  you  advise 
retiring  the  present  bond  issue? 

3.  Assuming  that  the  management  decides  to  raise 
additional  working  capital,  what  method  would  you 
suggest? 


Problem  116 

The  Cumulation  of  Credit  Operations  in  the 

Automobile  Industry 

The Automobile  Company  was  in  the  habit 

of  drawing  sight  drafts  on  the  wholesalers  to  whom 
their  cars  were  sold.  The  company  paid  the  makers 
of  accessories  and  parts,  from  whom  they  bought,  by 
trade  acceptances  drawn  for  the  usual  term.  The 
wholesalers  had  been  financing  themselves  by  dis- 
counting, sometimes  with  banks  but  usually  with 
finance  corporations,  their  short-time  promissory  notes 
secured  by  chattel  mortgages  or  trust  receipts  on  the 
cars  in  their  possession.  They  were  in  the  habit  of 
meeting  these  notes  at  maturity  largely  out  of  the  funds 
secured  from  the  retail  dealers,who  financed  the  sale  of 
cars  to  customers  in  the  manner  already  described  in 
a  previous  problem.     (Problem  37.) 

A  great  slump  in  sales  came  in  1920,  but  this  com- 
pany, thinking  that  the  market  was  off  only  temporarily, 
continued  to  manufacture  cars. 


WORKING  CAPITAL— MISCELLANEOUS      273 

Questions 

1.  Analyze  the  advantages  or  disadvantages  of  these 
several  methods  of  financing,  from  the  point  of  view 
of  the  automobile  industry. 

2.  What  financial  difficulties  would  the  company 
encounter  when  the  sales  practically  stopped? 

3.  How  could  it  have  been  extricated  from  these 
difficulties? 

4.  Do  you  approve  of  their  policy  in  continuing  to 
manufacture  the  cars? 

5.  What  new  financial  difficulties,  if  any,  were 
raised  by  this  policy,  and  how  .could  they  be  met? 


Problem  117 

Paying  Off  Unsecured  Creditors  With 

New  Security  Ishites 

One  great  corporation  owning  many  millions  of 
dollars  has  worked  out  a  "plan"  for  the  liquidation  of  its 
debts.  This  "plan"  calls  for  the  issuance  of  a  lot  of 
new  securities  to  be  used  in  paying  off  creditors  whose 
claims  are  either  partly  secured  or  not  secured  at  all. 
And  in  the  "plan"  it  is  pointed  out  that  these  securities 
may  be  used  by  the  creditors  as  collateral  against 
which  they  may  borrow  at  the  banks.  Just  how  this 
is  to  help  the  banking  situation  is  not  clear. 

Questions 

1.  Is  this  a  satisfactory  "plan"? 

2.  How  will  it  help  the  corporation? 

3.  How  will  it  affect  other  corporations? 


274  PROBLEMS  IN  BUSINESS  FINANCE 

Problem   118 

The   Inter-relation  of  Credit  Operatk:n.s  in  the 
Different  Stages  of  an  Industry 

Jones,  a  cotton  broker,  had  been  selling  raw  cotton 
in  large  quantities  to  a  fabric  mill.  It  was  his  custom 
to  draw  drafts  at  90  days  on  the  mill.  This  ordinarily 
gave  ample  opportunity  for  the  raw  material  to  be  made 
up  and  sold  before  the  draft  became  due.  Drafts, 
when  accepted  by  the  mill,  were  discounted  with  a  large 
national  bank. 

The  fabric  mill  to  which  Jones  sold  had  been  in  a 
very  strong  financial  position  while  prices  were  on  the 
upward  trend.  It  had  accordingly  arranged  for  a 
liberal  line  of  credit  at  several  different  banks,  one  of 
which  was  the  same  bank  which  customarily  discounted 
the  broker's  paper. 

In  the  early  part  of  1920  the  fabric  mill  was  under 
contract  to  deliver  a  large  part  of  its  output  on  very 
favorable  terms  to  the  M.  Rubber  Tire  Company. 
These  goods  were  sold  on  open  account  and  ordinarily 
payment  was  made  at  the  first  of  each  month.  During 
the  year  1920,  however,  the  tire  company  became  a 
little  slow  in  its  payments. 

The  M.  Rubber  Tire  Company  was  selling  a  good  deal 
of  paper  in  the  open  market.  This  paper  was  rated  as 
prime  paper  by  all  the  banks  and  was  held  in  con- 
siderable quantity  by  the  national  bank  already 
referred  to. 

The  M.  Rubber  Tire  Company  sold  a  part  of  its 
output  direct  to  a  well-known  automobile  manu- 
facturer whose  business  fell  off  rapidly  in  the  latter 
part  of  1920.  The  M.  Tire  Company,  hoping  to  con- 
tinue its  output,  even  in  the  face  of  this  depressing 
situation,  at  the  end  of  the  year  began  selling  tires  to 
dealers  at  a  price  concession,  dating  for  spring  delivery, 
and  receiving  from  the  dealers  trade  acceptances 
drawn  for  90  days.  As  the  payments  from  the  auto- 
mobile manufacturer  became  slow,  some  of  these 
acceptances  were  discounted  with  several  different 
banks  by  the  M.  Tire  Company. 


WORKING  CAPITAL— MISCELLANEOUS      275 

The  automobile  company  to  which  this  tire  company 
was  selHng  went  into  a  receiver's  hands  early  in  1921. 
This  catastrophe,  together  with  the  delayed  payments 
from  other  sources,  and  the  losses  due  to  price  reduction, 
inventory  shrinkage,  and  the  like,  forced  the  M.  Tire 
Company  also  into  a  receivership. 

Just  at  this  time  the  bank  examiners,  in  looking  over 
the  loans  of  the  national  bank  before  mentioned, 
found  that  they  held  the  commercial  paper  of  the  M. 
Tire  Company,  were  making  direct  loans  to  the  fabric 
mill,  and  had  discounted  the  drafts  of  Jones,  the  cotton 
broker. 

As  the  tire  company  had  now  become  practically 
insolvent,  it  was  evident  that  neither  the  fabric  mill, 
nor  in  turn  the  cotton  broker,  could  hope  to  receive 
payments  which  would  enable  them  to  liquidate  their 
obligations  to  the  bank.  In  practical  effect,  therefore, 
all  of  these  different  types  of  bank  loans  were  being  made 
to  the  now  financially  embarrassed  tire  compan5^ 
The  aggregate  loan  thus  arrived  at  was  much  in  excess 
of  the  legal  maximum  of  10  per  cent  of  the  bank's  capi- 
tal and  surplus  which  could  be  lent  to  one  borrower. 
This  situation  was  pointed  out  to  the  bank,  which  was 
asked  to  remedy  the  condition  as  soon  as  possible. 

The  fabric  mill  is  still  perfectly  solvent.  Its  current 
assets,  however,  are  temporarily  rather  frozen.  The 
bank  finds  it  easiest  to  bring  pressure  to  bear  on  the 
mill  and  to  curtail  its  line  of  credit.  The  situation 
having  developed  thus  far,  the  president  of  the  fabric 
mill  asks  what  his  next  step  should  be. 

Questions 

1.  What  weaknesses  in  our  credit  structure,  if  any, 
are  indicated  by  this  problem? 

2.  Is  the  position  in  which  the  fabric  mill  finds 
itself  the  result  of  the  present  disorganized  financial 
situation  or  of  an  unwise  policy  on  the  part  of  the 
management? 

3.  What  suggestions  can  you  offer  to  the  president 
of  this  fabric  mill? 


276  PROBLEMS  IN  BUSINESS  FINANCE 

4.  P>om  the  point  of  view  of  what  is  probably  best 
for  the  industry,  what  advice  would  you  give  to  the 
bank? 


Problem  119 
Current  Financing  and  the  Business  Cycle 

''The  Government  has  not  paid  the  railroads,  and  the 
railroads,  in  their  turn,  are  not  paying  what  they  owe. 
This  one  interruption  multiplies  the  hardship  on  the 
whole  community,  and  it  is  multiplied  again  when  the 
companies  and  individuals  to  whom  the  railroads  owe 
moneys  are  rendered  incapable  of  making  prompt 
payment  to  their  creditors  because  of  the  slowness  of 
pay  by  the  railroads.  And  so  it  goes  down  the  line, 
with  the  amount  "frozen"  steadily  and  rapidly  mount- 
ing each  time  it  is  passed  to  a  new  class.  If  the  Govern- 
ment pays  the  roads,  the  roads  can  pass  the  proceeds 
along  to  their  creditors,  and  their  creditors  can  pass 
the  money  along  to  the  next  grouj),  and  so  on.  The 
original  debt  cf  if3oO,()00,000  to  §400,000,000  blocks 
piobably  seveial  billions  of  payments,  and  the  freezing 
process  bec(  mcs  a  real  factor  in  the  credit  situation. 

In  the  second  place,  there  is  the  West  and  the  South. 
Neither  the  West  nor  the  South  liquidated  last  fall. 
It  did  some  liquidation,  but  it  was  little  more  than 
going  around  the  edges.  The  great  agricultural 
sections  were  caught  in  the  price  decline,  and  at  first 
would  not  sell  and  later  could  not  sell.  It  is  one  thing 
to  say,  now  that  the  collapse  of  commodity  prices  has 


WORKING  CAPITAL— MISCELLANEOUS      277 

become  real,  that  liquidation  should  have  taken  place. 
But  it  is  distinctly  another  to  offer  workable  ways  for 
Hquidation  now  that  collapsed  prices  are  an  actuality. 

Commodities  have  fallen  too  rapidly  to  allow  of  a 
real  liquidation  now.  Cotton,  for  instance,  which  was 
the  greatest  export  crop  we  had  last  year  in  point  of 
dollar  value,  has  declined  some  69  per  cent  in  value 
since  the  last  week  in  July,  1920,  The  July  price  may 
have  been  too  high,  and  was,  as  a  matter  of  fact,  an 
artificial  value,  but  even  so,  a  69  per  cent  depreciation 
is  a  thing  to  be  reckoned  with,  even  when  it  is  from 
absurd  levels.  And  if  the  stocks  of  cotton  now  being 
carried  were  to  be  thrown  on  the  market,  the  depre- 
ciation probably  world  run  closer  to  90  per  cent,  or 
more  than  to  the  present  69  per  cent. 

In  the  same  way  wool  has  suffered.  Thei'e  are  huge 
stocks  of  wool  on  hand  now,  and  probably  they  could 
all  be  liquidated  at  a  price.  But  that  price  would  ruin 
the  wool  industry.  Sheep  have  to  be  kept  not  only  for 
current  needs,  but  for  those  of  next  year  and  the  year 
after,  and  the  year  after  that.  Herds  cannot  be  dis- 
sipated, and  if  present  market  prices  are  too  low  to 
allow  of  realization  on  current  herds  and  current  stocks 
of  wool,  the  stocks  and  the  herds  have  to  be  carried 
until  they  can  be  sold. 

These  things  are  being  carried.  They  are  being 
carried  by  banks  which,  for  the  time  being,  cannot 
reaUze  on  their  loans.  They  could  in  a  pinch  take  over 
the  collateral  on  which  they  have  made  advances,  and 
doubtless  some  of  them  have  done  so  already.  But 
that  does  not  alter  the  situation.  The  banks  cannot 
sell  the  collateral  and  reimburse  themselves,  so  they 
would  be  no  better  off  in  a  broad  general  way  than 
they  were  before. 

And  then  there  are  the  "limping  corporations,"  as 
they  have  been  called.  This,  perhaps,  is  a  much  more 
serious  situation  than  generally  is  realized.  The 
public,  for  obvious  reasons,  has  not  been  informed  as  to 
the  number  or  the  condition  of  many  large  corporations 
which  are  having  difficulty  in  meeting  their  bank  loans. 


278         PROBLEMS  IN  BUSINESS  FINANCE 

Last  fall,  when  the  time  arrived  for  final  payment  of 
Federal  income  and  profits  taxes,  a  eood  many 
corporations — and  more  than  a  few  individuals,  too, 
for  that  matter — had  to  be  helped  out  by  the  banks  in 
order  to  meet  their  tax  debts.  How  many  of  the  loans 
made  then  have  been  paid  off  subsequently  cannot  be 
told,  but  bankers,  speaking  of  their  individual  ex- 
periences, say  that  the  total  is  not  large." 

(Statement  made  early  in  1921.) 

Questions 

1.  Do  you  agree  with  the  opinions  above  expressed. 

2.  Discuss  critically  and  constructively  the  steps 
which  might  have  been  taken  to  avoid  the  financial 
difficulties  here  described. 


PART  III 
PROBLEMS  OF  INTERNAL  FINANCING 


CHAPTER  VI 

FINANCIAL  ASPECTS  OF 
PURCHASING  GOODS 


References: 

Brace,  Value  of  Organized  Speculation,  50-179. 
*Gerstenberg,  Principles  of  Business,  373-399. 

Rindsfoo.s,  Purchasing.  1-69. 
*Twyford,  Purchasing  and  Storing,  14-133,  157-172. 


MANY  a  concern  which  has  been  originally  well 
financed,  falls  into  serious  financial  difficulties 
as  the  result  of  overbuying  or  buying  at  the 
wrong  time.  Some  of  the  astounding  failures  of  the 
post-war  period  ha\'e  been  largely  or  solely  due  to  an 
improper  purchasing  policy.  While  prices  are  tending 
continually  upward,  it  may  be  possible  to  attain  an  ap- 
parent financial  success  even  though  unwise  methods 
are  followed.  The  acid  test  of  the  policy,  however, 
comes  in  the  period  of  falling  prices. 

Since  most  businesses,  from  the  least  even  unto  the 
greatest,  are  in  danger  of  going  wrong  at  this  point, 
largely  through  failure  to  correlate  the  purchasing  pol- 
icy with  the  general  financial  program  and  the  Business 
Cycle,  it  has  seemed  worth  while  to  include  some  sug- 
gestive problems  on  a  few  of  the  financial  aspects  of 
purchasing  goods.  Some  of  the  problems  in  Chapter 
X  may  also  prove  helpful  in  this  connection. 


281 


282         PROBLEMS  IN  BUSINESS  FINANCE 
Problem   I'iU 

GeNKKAL    PkOBLEM    in    PuRCHASINCi    AND    CrEDIT 

J.  C.  Penney  writes  as  follows  regarding  his  early 
purchasing  and  credit  policy: 

"After  three  years  the  partners  l)egan  to  consider  opening 
a  store  in  Keininerei'.  By  that  time  I  had  saved  $500.  The 
store  was  phmned  to  start  with  a  capital  of  S6,000  and  they 
offered  me  a  third  interest  if  I  could  raise  the  money;  I 
borrowed  $1,500  and  took  their  offer. 

Within  five  years  1  had  paid  off  my  loan  and  l)ought  out 
my  partners.  We,  however,  continued  our  joint  buying 
trips  to  the  East  until  my  bujdng  was  large  enough  to  gain 
the  quantity  advantage.  I  never  bought  from  a  salesman 
and  never  asked  for  credit.  In  those  days  T  did  not  even 
borrow  from  the  bank.  Everything  was  on  a  cash  basis 
and  I  bought  and  sold  only  staple  lines  of  dry-goods  and 
notions.  They  sold  cjuickly  because  the  price  was  low,  the 
quality  high,  and  the  guarantee  of  satisfaction  was  absolute. 
I  found  that  I  had  to  make  more  than  two  trips  a  year  to 
market,  and  also  I  found,  that  buying;  frequently  permitted 
me  always  to  dispose  of  my  stock  on  the  buying  price.  My 
sales  expense  never  exceeded  10  per  cent  and  was  usually 
lower.  I  could  make  a  good  profit  at  prices  the  other  stores 
could  not  touch  and  so  I  never  had  to  hold  a  mark-down  or 
bargain  sale. 

The  panic  of  1907  had  not  touched  me;  it  had  only  en- 
abled me  to  buy  at  very  low  prices  for  cash  and  hence  gave 
me  a  still  greater  advantage  over  competitors  who  wanted  to 
buy  on  credit — when  credit  was  hard  to  get. 

The  original  merchandising  plan  of  the  shack  at  Kem- 
merer  is  still  the  plan  under  which  we  operate.  We  never 
rent  a  store  in  what  is  supposed  to  be  a  good  location  and  at 
a  high  rental.  We  try  to  locate  in  a  fairly  central  position 
in  a  town,  but  rarely  on  the  main  street.  We  want  low 
rents.  We  take  to  a  side  street  and  if  the  side  streets  are 
expensive,  then  we  go  to  the  edge  of  the  business  section  or 
wherever  the  rents  are  cheap.  We  find  that  people  will 
come  to  our  stores  to  buy  without  regard  to  location;  if  we 
paid  high  rents,  we  could  not  sell  at  a  profit  and  keep  within 
the  line  of  our  small  mark-up.  So  we  pay  no  attention  at 
all  to  the  number  of  people  who  habitually  use  a  street  on 
which  we  plan  to  opsn  a  store.     If  1,000  people  a  day  pass 


PURCHASING  AND  FINANCE  283 

one  point  and  the  rental  is  high,  we  should  not  hesitate  to 
go  to  a  street  where  only  50  people  pass  in  a  day — if  the 
accommodations  are  good  and  the  rental  low. 


Our  policy  is  to  buy  frecinently  and  for  cash.  We  hold 
that  it  is  no  part  of  the  merchandising  function  to  speculate 
in  goods  value.  We  might  make  large  futui'c  contracts  on  a 
rising  market  and  profit  l\v  the  increased  value  of  the  goods. 
But  on  the  other  hand,  future  contracts  woiUd  be  losing 
ventures  in  a  falling  market.  We  should  have  to  alter  our 
principle  of  merchandising  to  sell  the  cheaply  bought  goods 
at  the  market  instead  of  at  cost,  while  the  goods  bought  in  a 
falling  market  could  not  be  sold  at  cost  over  a  long  period. 
So  instead  we  buy  frequently,  get  the  goods  out  instantly 
to  the  stores  by  express  and  sell  at  cost  plus  our  mark-up. 
Our  stores  turn  their  stocks  on  an  average  of  five  times  a 
year,  so  by  the  time  any  large  change  in  price  has  reached 
the  retail  market  we  are  buying  and  sending  out  at  the 
new  price. 

Neither  the  blanches  nor  the  stores  carry  inventories 
above  what  might  be  termed  current  needs.  With  our 
fingers  always  in  the  primary  markets  and  with  cash  in  our 
pockets,  we  are  content  with  hand-to-mouth  buying  and 
.permit  the  other  man  to  do  the  guessing  on  price. 

We  do  not  gamble  against  the  market ;  we  buy  what  we 
need  and  not  what  the  other  man  wants  to  sell  to  us.  In 
the  end  we  obtain  our  goods  at  a  lower  price  than  the 
average  buyer  who  attempts  to  get  the  better  of  the  market 
and  we  are  never  stuck  with  great  lots  of  high-priced  goods. 
Therefore,  we  have  no  special  sales  of  any  kind  throughout 
the  operation  of  adjusting  our  inventoi'ies.  A  man  with  cash 
can  always  buy  what  he  needs. 

We  bu3'  only  staples;  we  do  not  carry  fancy  or  unusual 
goods  of  any  kind.  Our  appeal  is  to  the  middle  class  that 
wants  honest  merchandise. 

We  do  not  want  the  whole  trade  anywhere;  we  want 
only  that  trade  to  which  we  can  promise  to  give  the  largest 
value  for  the  dollar.  That  we  have  always  done,  but  we 
could  not  continue  to  do  it  if  we  experimented  with  styles 
or  laid  wagers  against  the  course  of  prices. 

If  we  wagered  against  prices,  customers  would  lose  while 
prices  were  going  up,  and  we  should  lose  when  they  were 
going  down.  We  are  distributors  of  merchandise,  not 
speculators,  and  during  oui'  19  years  of  business  life  we  have 
never  had  to  take  a  serious  loss  on  merchandise." 

(System,  February,  1921.) 


284  PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Analyze  critically  the  financial  methods  and  poli- 
cies followed  by  the  above  concern. 

2.  Do  you  expect  that  such  a  concern  would  ever 
get  into  financial  diflSculties?     Why? 

3.  Do  you  approve  of  the  methods  of  purchasing 
followed  by  this  company? 

4.  Would  such  methods  be  satisfactory  for  all  con- 
cerns? 


Problem  HI 
Buying  from  Hand  to  Mouth 

The  owner  of  a  large  grocery  store  writes  as  follows : 

"We  always  buy  less  than  we  expect  to  sell.  That 
way  we  protect  ourselves  against  unexpected  develop- 
ments. We  get  our  profit ;  and  when  we  have  sold  the 
lot  we  go  into  the  market  and  buy  whatever  we  need 
to  finish  the  season.  We  make  a  moderate  profit,  cer- 
tainly no  loss,  on  that  business." 

Questions 

1.  What  are  the  real  gains,  if  any,  resulting  from 
this  poUcy? 

2.  Should  you  have  considered  this  to  be  a  satisfac- 
tory policy  in  1917? 

3.  Would  it  be  safe  for  every  type  of  business  to  fol- 
low this  policy? 

(Reference:     System,  April  1921,  p.  544,  ff.) 


PURCHASING  AND  FINANCE  285 

Problem  l'2'i 

Relation  Between  the  Pihchasinc;  Polk  y, 

the  tlrnovek,  and  profits* 

The  vital  (luestioii  is  not  liow  many  goods  can  he  bought 
with  a  given  amount,  hut  how  nnich  net  profit  can  be 
made;  and  the  net  profit  depends,  not  on  the  first  cost  of  the 
merchanchse,  l)ut  entirely  on  the  turnovei'. 

On  such  staple  lines  as  hosieiy  and  underweai'.  a  retailer 
coild  well  afford  to  i)ay  10  percent  more  foi- an  ai'ticle,  if  by 
doing  so  ho  could  increase  his  rate  of  turnovei'. 

This  seems  almost  like  a  foolish  statement,  but  actual 
facts  will  prove  it  sound. 

Suppose  a  merchant  uses  60  dozen  of  a  hose  in  two  months, 
which  could  be  bought  direct  from  the  mill  at  95  cents,  or 
at  $1.05  from  the  wholesale  house.  If  he  buys  from  the 
mill,  he  has  to  get  at  least  60  dozen,  but  in  l)uying  them  from 
a  jobbei-  he  co'dd  get  along  with  only  10  dozen,  which  would 
give  him  5  dozen  foi'  his  foi'ward  stock  and  the  same  amount 
in  reserve. 

Buying  direct,  the  stock  (60  dozen)  amounts  to  S57,  and 
the  total  purchases  for  the  year  (360  dozen)  to  $342. 

If  these  goods  are  sold  at  two  pair  fo:-  a  quarter,  the  year's 
gross  business  on  the  item  would  amount  to  $540.  A  20 
per  cent  co^t  of  doing  Inisiness  on  this  would  be  $108,  leaving 
$432.  Deducting  the  cost,  $342,  gives  a  net  profit  on  the 
$57  investment,  of  $90. 

*Elwood  Sampson,  Chairman,  Public  Relations  Committee,  National 
.\ssociation  of  Purchasing  Agents,  Detroit,  writes  in  an  interesting 
manner  regarding  "Profits  from  Purchases"  in  the  Michigan  Man- 
ufacturer and  Financial  Record,  for  May  14,  1921.  Some  of  his 
remarks  may  be  summed  up  as  follows: 

"The  most  evident  possibihty  of  purchasing  profit  is  in  foreteUing 
the  trend  of  prices.  Although  this  is  so  recognized  by  almost  every 
business  man,  still  the  development  in  this  direction,  with  a  few 
exceptions,  is  still  in  an  infantile  state.  The  general  method  at 
present  of  judging  the  maiket  trend  is  to  talk  the  situation  over  with 
this  one  and  that  one  who  ought  to  be  in  a  position  to  be  fully 
informed  concerning  his  particular  commodity;  read  the  various  trade 
papers;  note  what  various  competitors  are  doing,  and  then  act  accord- 
ingly. In  this  method  judgment  is  based  mostly  upon  siu'face  indica- 
tions. The  danger  of  this  is  that  surface  signs  apparently  all  point  one 
way.  Also,  they  have  a  most  unhappy  faculty  of  completely  reversing 
themselves  overnight.  Today  everything  looks  losy.  Tomorrow  is 
just  the  opposite.  On  the  other  hand,  here  and  there  in  Detroit  and 
throughout  the  country  have  been  buj^ers  who  have  operated  upon  a 
carefully  worked-out  scientific  plan  of  forecasting  the  market.  For 
such,  final  judgment  is  based  upon  a  consideration  of  the  underlying 
fundamental  factors  and  not  merely  on  surface  indications.  These 
men  were  not  buying  heavy  a  year  ago,  for  fundamental  signs  all 
pointed  to  a  heavy  decline  during  the  latter  part  of  1020." 

To  illustrate  how  this  is  done,  the  author  takes  a  tried  and  proved 
plan  (not  an  academic  one)  and  reduces  it  down  to  a  classified  outline 
of  the  factors  considered. 


286  PROBLEMS  IN  BUSINESS  FINANCE 

In  buying  from  a  jobber  the  stock  (10  dozen)  would  cost 
$10.50,  and  the  yearly  purchases  (3G0  dozen),  8378.  The 
selHng  price  and  the  cost  of  doing  business  are  the  same, 
no  matter  how  the  goods  were  bought,  so  deducting  S378 
from  S432  shows  a  net  profit  of  $54. 

This  apparently  shows  a  loss  of  net  profit  on  this  par- 
ticular transaction,  of  .$36. 

(System,  July  1921,  p.  40,  flf.) 

Questions 

1.  Is  the  above  reasoning  applicable  to  all  cases? 
Is  any  loss  involved? 

2.  What  would  be  the  annual  gains  resulting  from 
buying  in  the  smaller  quantities? 


Problem  I'iS 
The  Re.sults  of  "Overbuying"  in  a  Retail  Store* 

Mr.  X.  was  a  retail  men's  clothing  merchant  in  a 
small  middle  western  town.  For  a  man  in  his  position 
his  education  was  fair  and  he  had  more  than  the  average 
knowledge  of  accounting,  which  had  been  secured 
through  local  business  schools  and  correspondence 
schools.  He  was  a  fairly  active  member  of  one  of  the 
local  churches,  to  all  appearances  had  no  bad  habits, 
was  married  and  the  father  of  two  children.  In  fact, 
he  was  a  perfectly  respectable  and  desirable  citizen  of 
his  community,  though  he  was  practically  without 
capital  of  his  own  and  without  any  connections  which 
would  enable  him  to  borrow  local  private  capital  or  to 
secure  funds  from  the  local  bank. 

In  1911,  Mr.  X.  decided  to  launch  into  the  merchan- 
dising business,  and,  as  might  be  expected,  he  fell  into 
the  rather  common  error  in  this  line  of  business — he 
overbought.  This  overbuying,  he  explained,  was  due 
to  the  fact  that  salesmen  offered  him  such  a  liberal 

*  See  also  problems  in  Chapter  X  for  fiu-ther  results  of  "overbuying." 


PURCHASING  AND  FINANCE  287 

extension  of  credit  that  the  time  of  payment  seemed 
far  away.  Of  course,  when  he  accepted  the  terms 
offered  he  was  not  able  to  take  the  usual  cash  discounts 
because  of  his  lack  of  capital.  Nor  did  he  at  the  time 
fully  realize  how  much  could  be  saved  by  using  the 
cash  discount.  In  course  of  time,  it  became  evident 
to  him  that  it  would  be  impossible  to  dispose  of  all  the 
goods  which  he  had  bought,  in  the  town  where  his  store 
was  located.  Accordingly,  feeling  that  he  had  already 
made  a  misstep  which  could  not  be  rectified  without 
taking  a  great  chance,  he  decided  to  open  up  a  store 
in  an  adjoining  town  in  order  to  dispose  of  his  surplus. 
This  move  was  apparently  successful,  inasmuch  as  he 
managed  to  clean  up  his  stock  and  pay  off  his  maturing 
obligations. 

Somewhat  elated  by  his  seeming  success,  he  again 
launched  optimistically  into  a  buying  campaign,  urged 
on  by  the  same  salesmen  who  had  before  induced  him 
to  overpurchase.  As  he  did  not  yet  have  enough  cap- 
ital in  his  business  to  enable  him  to  borrow  from  the 
local  bank,  he  did  not  have  the  opportunity  to  secure 
bankers'  advice,  which  might  have  prevented  this  mis- 
take. Consequently,  he  again  overbought,  and,  trust- 
ing to  his  past  luck,  opened  a  third  store  in  another 
town  in  order  to  dispose  of  the  surplus  goods  which  he 
found  could  not  be  marketed  by  the  first  two  stores. 

By  this  time  our  dealer  had  developed  for  himself  a 
fairly  careful  system  of  accounting  which  enabled  him 
to  tell  with  reasonable  accuracy  where  his  finances 
stood  at  the  end  of  each  month.  He  knew  what  it 
cost  him  to  do  business  and  how  long  it  would  take 
him,  provided  business  was  reasonably  good,  to  pay  off 
his  mercantile  creditors.  Unfortunately,  however,  the 
European  war  broke  and  business  fell  off  markedly,  so 
that  Mr.  X.  was  threatened  with  bankruptcy.  The 
line  of  goods  which  he  aheady  had  was  turning  slowly, 
so  that  there  was  good  reason  to  expect  that  it  would 
eventually  be  sold.  On  the  other  hand,  it  was  quite 
apparent  that  he  could  not  keep  his  trade  unless  he 
could  secure  several  thousand  dollars'  worth  of  addi- 


288         PROBLEMS  IN  BUSINESS  FINANCE 

tional  new  goods  to  attract  the  holiday  trade.  Yet  in 
view  of  the  fact  that  most  of  his  accounts  were  already 
past  due,  there  seemed  to  be  no  possibility  of  getting 
further  credit. 

Confronted  with  this  situation,  with  absolute  failure 
apparently  inevitable,  Mr.  X.  thought  that  boldness 
coupled  with  downright  honesty  might  save  the  day, 
for  it  was  clear  that  no  other  resource  remained. 
Accordingly,  having  prepared  a  careful  statement  of 
his  financial  condition  and  having  drawn  up  a  set  of 
figures  to  show  his  costs  of  doing  business,  he  wired  his 
chief  mercantile  creditors  that  he  would  be  in  their  cjffice 
in  Cleveland  at  10  o'clock  the  next  morning.  In  accor- 
dance with  this  message  he  arrived  on  the  stroke  of  10, 
asked  for  the  manager,  put  before  him  the  statement  of 
his  financial  condition  and  his  cost  sheet,  and  said: 

"Mr ,  we  are  up  against  it.    Failure  stares  us 

in  the  face .  We  owe  money  to  a  large  number  of  sell- 
ing houses  (at  this  point  showing  the  list  of  his  credi- 
tors), and  your  firm  is  our  largest  creditor.  We  have 
foolishly  overbought,  though  we  would  have  been  able 
to  work  our  way  out  had  it  not  been  for  the  depressed 
conditions.  Now  we  throw  ourselves  on  j^our  mercy 
absolutely.  If  we  fail,  you  will  lose  a  good  deal  of  money. 
If  you  help  us  to  pull  through,  you  will  have  our  ever- 
lasting gratitude  and  all  the  future  business  that  we 
can  give  you.  We  know  where  we  stand  financially, 
and  know  what  the  trouble  is,  and  know  what  it  costs 
us  to  do  business,  and  know  that  our  costs  are  rela- 
tively very  low,  and  feel  certain  that  we  can  pay  off 
our  obligations  at  the  end  of  several  months.  However, 
in  order  to  hold  and  develop  the  trade  and  to  retrieve 
our  past  mistakes,  it  will  be  necessary  for  us  to  buy 
more  goods.  In  fact,  we  now  need  from  you  a  bill  of 
$5,000  worth  of  holidav  goods.  What  will  you  do 
for  us?" 

Questions 

1.  Should  Mr.  X.  have  opened  up  new  stores  to  dis- 
pose of  his  surplus  goods,  when  he  did  not  even  have 
enough  capital  to  run  one  store? 


PURCHASING  AND  FINANCE  289 

2.  In  view  of  the  fact  that  he  persistently  over- 
bought, do  you  believe  that  he  was  a  man  whom  dealers 
were  justified  in  trusting? 

3.  What  kind  of  financial  advice,  if  any,  do  you  think 
the  various  salesmen  should  have  given  him? 

4.  Can  you  suggest  any  method  whereby  he  might 
have  put  himself  in  a  position  to  take  advantage  of 
the  cash  discounts  instead  of  financing  himself  through 
dealer  credit? 

5.  Did  Mr.  X.  follow  a  correct  pohcy  in  approaching 
his  largest  creditor  in  the  manner  outlined  and  what 
do  you  expect  would  be  this  creditor's  response? 

6.  Indicate,  with  reasons  therefor,  what  you  expect 
would  be  the  financial  future  of  Mr.  X'.s  business. 


Problem  I'i^ 
The  Goodyear  Company's  Purchasing  Policy 

In  System  for  August,  1920,  there  appeared  an  article 
by  President  Seiberling,  of  the  Goodyear  Tire  &  Rubber 
Company,  on  the  financial  polic}^  of  purchasing  goods, 
in  which  statements  such  as  the  following  were  made. 

In  referring  to  the  early  days  of  the  Goodyear  Com- 
pany, some  twenty  years  ago,  he  said: 

''Because  we  had  so  little  money  we  learned  how  to 
buy. 

The  company  usually  had  to  pay  cash  because  it 
was  so  little  known  and  so  poor  that  credit  could  not 
properly  be  extended  to  it. 

The  fact  that  in  the  beginning  we  had  to  buy  our 
raw  materials  for  cash  allowed  us  to  pick  and  choose. 


290         PROBLEMS  IN  BUSINESS  FINANCE 

"Because  when  we  were  small  we  planned  our  buying 
ahead — that  is  one  of  the  reasons  that  today  we  are 
large. 

"If  you  know  how  to  buy  and  to  make,  the  world  will 
make  a  path  to  your  door." 

He  further  defends  the  policy  of  controlling  a  part 
of  the  source  of  supply  of  goods  needed  on  the  ground; 
first,  that  it  gives  the  manufacturer  a  line  on  the  fair 
price  which  should  be  paid,  and  second,  that  it  makes 
the  concern  more  independent.  He  also  suggests  that 
such  a  policy  may  help  to  stimulate  "backward  mar- 
kets. "  In  line  with  this  reasoning,  he  describes  in  glow- 
ing terms  the  gains  which  have  come  to  the  Goodyear 
Company  from  purchasing  and  developing  a  coal  mine, 
cotton  plantations  in  Arizona,  fabric  mills  in  New 
England,  and  rubber  plantations  in  Sumatra. 

When  the  Goodyear  Tire  and  Rubber  Company 
failed  in  the  autumn  of  1920,  the  chief  criticisms  made 
by  the  bankers  who  worked  out  the  plan  for  the  future 
financing  of  the  company,  which  resulted  in  Seiberling's 
having  all  connections  severed,  were  two — first,  that 
the  Goodyear  Company  had  recklessly  expanded  its 
fixed  investment  by  attempting  to  control  or  develop 
the  source  of  supply  of  raw  materials,  the  fixed  invest- 
ment having  more  than  doubled  in  one  year's  time. 
Secondly,  they  were  appalled  by  the  very  high  merchan- 
dise inventory  and  the  commitments  for  purchases 
which  had  been  made  at  high  prices.  The  company 
had  been  trying  to  "buy  up"  the  rubber  market.  It 
was  necessary  to  write  ofT  many  millions  of  dollars 
because  of  this  situation,  and  a  surplus  of  more  than 
$30,000,000  in  1919  was  changed  to  a  deficit  of  more 
than  $15,000,000  by  the  end  of  1920. 

Questions 

1.  Do  you  agree  with  the  statements  made  by  Mr. 
Seiberling  regarding  the  proper  purchasing  policy? 

2.  If  the  general  principles  which  he  outlined  are 
sound,  how  do  you  account  for  the  condition  in  which 


PURCHASING  AND  FINANCE  291 

the  Goodyear  Company  was  found  shortly  after  Seiber- 
ling's  article  was  written? 

3.  What  Ught,  if  any,  does  this  problem  throw  on 
the  financial  considerations  involved  in  purchasing 
raw  materials? 


Problem  125 
The  Possible  Results  of  Accepting  One's  Commitments 
When  Others  are  Canceling 

The  N.  Cotton  Cloth  Mill  carries  on  solely  weaving 
operations  of  a  specialized  sort.  It  is  a  very  old  mill 
with  an  excellent  credit  reputation,  having  financed  it- 
self out  of  earnings  until  its  resources  were  very  high. 
During  the  year  1919-1920,  owing  to  the  conditions  then 
prevailing,  it  was  common  for  mills  of  this  sort  to  have 
contracts  with  makers  of  yarn  so  as  to  be  assured  of 
the  needed  supply.  This  mill  was  no  exception  to 
the  rule. 

When  the  general  market  slump  came  in  1920,  the 
N.  Cotton  Cloth  Mill,  proud  of  its  past  record,  con- 
tinued to  accept  all  the  yarn  which  it  had  agreed  to 
take,  at  the  high  prices  prevailing  at  the  time  the  eon- 
tracts  were  made.  Thus  the  inventories  piled  up,  the 
cash  position  became  weak,  and  the  notes  payable 
increased. 

In  the  months  of  depression  which  followed,  most  of 
the  competitors  of  this  mill  either  could  not  or  would 
not  accept  the  shipments  of  yarn  which  they  had  agreed 
to  take.  Some  of  them,  by  the  way,  were  purchasing 
from  the  same  yarn  mills  which  furnished  goods  to  the 
N.  Company.  They  either  canceled  their  orders 
altogether,   or  managed   to  secure  an   adjustment   of 


292  PROBLFMS  IN  BUSINESS  FINANCE 

prices.  Thus  they  hoped  to  save  their  present  credit 
position  by  throwing  the  burden  back  on  the  spinner. 
They  were  further  putting  themselves  in  a  position  to 
buy  yarn  at  a  much  lower  figure,  as  the  price  of  cotton 
rapidly  dropped.  Hence,  they  expected  to  be  in  a  posi- 
tion, when  operations  were  resumed,  to  cut  under  the 
price  for  cloth  at  which  their  larger  and  erstwhile 
stronger  competitor  could  afford  to  produce. 

Questions 

1.  From  the  long-run  financial  point  of  view,  do  you 
think  the  N.  Company  acted  wisely  in  continuing  to 
accept  the  contracts  made  when  prices  w^ere  much 
higher? 

2.  Do  you  think  that  the  smaller  competitors  would  be 
justified  in  cutting  their  prices  below  their  larger  rivals? 

3.  If  the  competitors  should  cut  the  price  below  that 
which  can  be  made  by  the  large  concern,  what  would 
you  expect  the  ultimate  efTect  to  be, 

(a)    On  the  finances  of  the  group  of  smaller 
companies, 

(6)    On  the  N.  Company? 

4.  Assuming  that  the  N.  Company's  current  ratio  is 
far  below  the  danger  line,  also  that  no  securities  can 
be  sold  for  additional  financing  except  to  rival  mill 
owners,  how,  if  at  all,,  can  this  company  save  itself 
from  financial  ruin? 


Problem  126 
Hedging  Operations 

There  appears  to  be  little  uniformity  in  the  methods 
followed  by  cotton  mills  in  financing  their  sales. 
Some  goods  are  made  up  largely  to  order  at  a  firm 
price,  while  in  other  cases  the  goods  are  manufactured 
before  actual  receipt  of  orders.  Though  there  is  a  wide 
margin  between  the  cost  of  the  raw  cc  ton  used  and 


PURCHASING  AND  FINANCE  293 

the  selling  price  of  the  finished  goods,  in  the 
case  of  a  cloth  mill,  yet  at  times  changes  in  the  market 
price  of  raw  cotton  may  become  very  significant. 

With  an  organized  cotton  exchange  it  is  possible  for 
mills  to  protect  themselves  against  loss  on  finished  goods 
by  buying  and  selling  cotton  futures.  The  extent  to 
which  this  practice  i§  carried  on  by  the  mills  themselves 
is  difficult  to  ascertain,  but  it  does  not  appear  to  be  so 
common  in  this  country  as  in  England,  where  there  is 
a  greater  specialization  in  the  various  processes  of  cotton 
manufacture.  However,  opinions  differ  widely  as  to 
whether  "speculation"  of  this  sort  is  a  proper  function 
of  the  manufacturer. 

In  the  case  of  flour  miUing,  there  is  a  comparatively 
narrow  margin  between  the  cost  of  wheat  and  the 
market  price  of  flour.  It  is  commonly  reported  that 
the  mills  very  frequently  protect  themselves  against 
price  changes  by  buying  and  selling  futures  on  the 
wheat  exchange. 

Questions 

1.  Under  what  circumstances,  if  at  all,  is  it  desirable 
for  a  cotton  mill  to  buy  and  sell  futures? 

2.  Should  you  expect  "hedging"  operations  to  be 
carried  on  more  commonly  by  those  mills  which  produce 
solely  yarn,  or  by  those  mills  which  do  not  make  their 
yarn,  but  only  weave  the  cloth? 

3.  Are  there  any  reasons  why  you  would  expect  the 
practice  of  "hedging"  to  be  more  common  in  the  case 
of  flour  mills  than  in  the  case  of  cotton  mills? 

4.  So  far  as  the  raw  material  is  concerned,  what  con- 
ditions seem  to  be  requisite  in  order  to  make  it  possible 
for  futures  to  be  bought  and  sold? 

(References:  Textile  Recorder,  June  21,  1921,  p.  67;  Brace,  151-159.) 


294  PROBLEMS  IN  BUSINESS  FINANCE 

Problem  I'ill 
Speculating  for  a  Rise  in  Price 

A.  In  1917,  the  dean  of  a  well-known  school  of  com- 
merce wrote  as  follows: 

"In  1898,  a  manufacturer  whose  raw  material  was 
steel  had  his  attention  called  to  some  facts  which  set 
him  thinking — that  the  price  of  steel  was  lower  than 
it  had  been  for  many  years;  that  prices  in  general  had 
been  falling  for  over  twenty-five  years;  that  business 
had  been  prostrate  since  the  panic  of  1893;  that  the 
increasing  output  of  gold  must  soon  have  an  effect  upon 
the  level  of  prices;  that  there  were  many  reasons  to 
expect  a  revival  of  business  in  the  near  future.  That 
was  in  June  of  1898.  The  manufacturer  was  so  im- 
pressed that  he  immediately  ordered  a  quantity  of 
steel  sufficient  to  last  him  for  three  years  if  the  demand 
for  his  product  did  not  increase.  In  September  busi- 
ness in  general  began  to  pick  up  and  by  the  end  of  the 
year  this  manufacturer  was  in  the  market  again  buying 
steel.  The  lively  demand  for  his  product  had  used  up 
all  that  he  had  bought  in  June. 

In  June  his  partners  said  he  was  crazy ;  in  December 
they  doubtless  thought  he  had  made  a  lucky  stroke. 
He  was  neither  crazy  nor  lucky.  He  made  money  sim- 
ply because  he  had  good  judgment  and  relied  upon  it." 

(Johnson,  J.  F.,  Busiriess  and  the  Man,  195-196.) 

B.  A  well-known  private  banker  and  successful  busi- 
ness man,  whose  interests  have  been  largely  in  the  iron 
and  steel  industry,  referred  in  March.  1921,  with  great 
approval  to  the  policy  reported  to  be  followed  by  one  of 
the  important  makers  of  steel  products  in  the  United 
States,  in  accordance  with  which  the  company  pur- 
chases large  quantities  of  steel  when  prices  are  very 
low  and  sells  the  material  to  other  companies  when 
prices  have  risen. 

This  particular  company  has  never  issued  any  bonds 
or  notes  and  has  been  financed  almost  solely  by  com- 
mon stock  issues.  Further,  it  has  built  up  a  surplus 
out  of  earnings  which  is  about  equal  to  its  outstanding 


PURCHASING  AND  FINANCE  295 

common  stock.  The  outstanding  preferred  stock 
amounts  to  little  more  than  20  per  cent  of  the  common 
stock.  The  company  has  had  an  excellent  dividend 
record  since  its  organization  in  1899.  It  is  reported 
to  have  made  a  good  deal  of  money  by  this  practice  of 
buying  steel  at  low  prices  far  in  excess  of  its  own 
immediate  future  needs,  and  selling  out  later  at  much 
higher  prices. 

C.  The  treasurer  of  a  very  large  and  prosperous  com- 
pany which  manufactures  paper  products,  and  which 
has  had  an  enviable  financial  history  over  a  long  period 
of  years,  stated  in  July,  1921,  that  it  was  wholly  con- 
trary to  the  policy  of  his  company  to  buy  any  material 
in  excess  of  their  needs  for  the  near  future.  He  says 
that  no  matter  how  low  prices  of  material  may  be,  it 
is  not  the  business  of  his  company  to  speculate  in  the 
goods  which  they  use.  The  companj^  is  thoroughly 
opposed  to  any  ''excess  purchasing,"  no  matter  how 
good  the  price  looks,  and  this  policy  has  beyond  a  doubt 
saved  the  business  many  a  financial  setback.  This 
concern  is  the  largest  of  its  kind  in  the  country,  and 
sells  its  finished  goods  to  many  thousands  of  relatively 
small  customers. 

Questions 

1.  Considered  as  a  general  principle,  do  you  think 
that  the  policy  outlined  in  case  "A"  is  a  financially 
sound  one? 

2.  What  is  your  opinion  of  the  wisdom  of  the  prac- 
tice followed  in  case  ' '  B  "  ? 

3.  Do  you  approve  of  the  policy  outlined  by  the 
treasurer  in  case  "C"? 

4.  How,  if  at  all,  would  you  draw  the  line  between 
forehanded  purchasing  and  speculation  in  materials 
used? 

5.  Will  your  answer  to  the  foregoing  questions  be 
influenced  in  any  way  by  the  nature,  size,  or  methods 
of  financing  of  the  business  under  consideration?  By 
the  period  in  the  Business  Cycle? 


296         PROBLEiMS  IN  BUSINESS  FINANCE 

Problem   hiS 

Shall  a  Concern  Whose  Resources  are  Low  PuRCHA«iE 
Heavily  in  Order  to  Get  a  "Bargain"? 

The Compan}'  is  a  manufacturer  of  surgical 

dressings.  Between  November,  1918,  and  January, 
1920,  it  lost  a  good  deal  of  money  as  a  result  of  the 
dumping  of  surgical  supplies  on  the  market  by  the  War 
Department  and  the  Red  Cross. 

As  a  result  of  heavy  liquidation  of  old  stocks,  the 
particular  number  of  grey  cloth  needed  for  making 
the  surgical  dressings  was  selling  at  90^^  per  pound 
as  compared  with  $1.15  per  pound  for  numbers  finer 
and  coarser.  Practically  all  the  goods  suitable  for  this 
purpose  w^as  made  by  mills  in  the  city  of  Fall  River. 

In  the  aggregate,  these  mills  had  on  hand  about 
5,000,000  yards  of  the  material,  and  their  sales  had 
been  slight  since  the  conclusion  of  the  armistice. 

In  January,  1920,  the   Company  was  in  so 

precarious  a  financial  condition  that  it  could  scarcely 
purchase  on  any  large  scale.  The  management,  having 
carefully  looked  over  the  situation,  estimated  that  the 
liquidation  of  old  stocks  w^as  about  complete  and  that 
they  w^ould  be  able  to  use  the  5,000,000  yards  now  held 
by  the  mills  w'ithin  about  six  months.    Consequently, 

the  treasurer  of  the Company  quietly  secured 

options  to  purchase  this  entire  supply  of  suitable  grey 
cloth  at  90^^  per  pound.  The  option  called  for  delivery 
of  such  a  portion  of  the  entire  supply  at  a  succession  of 
dates,  that  not  more  that  $250,000  would  be  needed  to 
finance  the  purchases  at  any  one  time.  With  $50,000 
cash  as  a  deposit,  the  remaining  $200,000  could  be 
borrow^ed  from  the  banks  on  warehouse  receipts  as  the 
cotton  cloth  was  being  used. 

At  5:45  p.  m.  of  the  day  upon  which  the  options  were 

to  expire  at  6  p.  m.,  the  treasurer  of  the Company 

went  to  a  financier,  B.,  with  the  following  proposition: 

If  B.  w^ould  purchase  the  cotton  as  needed  through 

a  syndicate,  or  some  such  arrangement,  the 

Company  would  guarantee  B.  against  any  loss,  would 


PURCHASING  AND  FINANCE  297 

pay  6  per  cent  for  the  money  advanced  plus  2  per  cent 
commission  on  the  quantity  purchased,  and  would 
divide  equally  any  profits  made,  based  on  the  difference 
between  the  market  price  of  the  product  at  the  time 
taken  and  the  purchase  price  of  90^  per  pound  secured 
by  the  option. 

Questions 

1.  Was  the    Company  following  a  sound 

financial  policy  in  attempting  to  purchase  cloth  under 
the  conditions  outlined? 

2.  How  should  you  expect  the  market  price  of  this 

cloth  to  be  affected  if  the  plan  proposed  by  the 

Company  was  carried  through? 

3.  Had  you  been  in  B's  place,  what  action  would 
you  have  taken? 


Problem  120 

Financial   Difficulty   Arising   from    Buying,   Due    to 

"Guessing"  the  Market  Wrong 

The  Z.  Company  is  a  partnership  engaged  in  the 
leather  export  business.  For  some  years  it  had  made 
a  specialty  of  dealing  in  a  low  grade  of  kid  leather 
which  was  used  in  some  European  countries,  particu- 
larly England,  for  making  cheap  shoes.  The  concern 
had  for  several  years  made  high  earnings  on  its  original 
capital  of  $150,000.  It  dealt  only  with  one  bank  and 
had  regularly  followed  the  practice  of  taking  its  trade 
discounts,  so  that  it  normally  carried  a  very  low  pro- 
portion of  accounts  payable. 

During  the  year  1919,  as  it  was  thought  that  there 
would  be  a  post-war  boom  in  European  countries,  the 


298  PROBLEMS  IN  BUSINESS  FINANCE 

Z.  Company  stocked  up  heavily  with  inventory,  bor- 
rowing from  its  bank  about  $200,000,  an  amount  con- 
siderably in  excess  of  its  own  capital,  in  order  to  carry 
this  inventory.  About  October,  1919,  the  export  market 
for  this  grade  of  leather  was  very  suddenly  cut  off,  due 
to  foreign  conditions,  so  that  both  the  inventories  and 
receivables  became  frozen.  The  European  market  now 
being  shut  off,  there  seemed  to  be  no  possibility  that  a 
domestic  demand  for  this  type  of  leather  could  be 
created.  Hence  the  inventories  shrank  so  rapidly  that 
all  equities  were  wiped  out  and  there  seemed  to  be 
no  possibility  that  the  bank  could  secure  payment  of 
its  notes  except  in  the  distant  future. 

In  January,  1921,  the  bank  was  still  carrying  this 
concern,  having  continuously  renewed  the  original  loan 
of  $200,000.  This  loan  was  a  straight  commercial  loan, 
and  practically  the  only  security  which  the  bank  had 
for  repayment  was  the  inventor}',  now  so  greatly  de- 
preciated that  the  value  was  wholly  problematical  and 
amounted  to  only  a  fraction  of  the  bank's  loan.  The 
company  had  almost  no  fixed  assets,  as  it  leased  its  real 
estate.  The  moral  risk  of  the  partners  had  always 
been  considered  good.  The  only  possibility  of  the 
bank's  recovering  on  this  loan  apparently  depends  on 
the  active  renewal  of  European  trade. 

Questions 

1.  What  particular  elements  of  financial  weakness 
are  apparent  in  the  case  of  this  concern? 

2.  Could  the  Z.  Company  have  followed  another 
course  since  the  slump  in  trade,  which  would  have  left 
it  at  present  in  a  stronger  position? 

3.  What  steps,  if  any,  do  you  believe  should  now 
be  taken, 

(a)  By  the  Z.  Company? 

(b)  By  its  bank  who  is  the  sole  creditor? 


PURCHASING  AND  FINANCE  299 

Problem   l.'JO 
A  Problem  on  Finanoinc;  Imports 

During  the  war  an  American  importing  house  with 
relatively  small  capital  wished  to  import  some  very 
large  orders  for  its  well-known  and  responsible  cus- 
tomers. The  orders  were  so  large  that  it  would  have 
been  impossible  for  the  company  to  finance  the  trans- 
action in  the  usual  direct  way  by  letting  bills  of 
exchange  be  drawn  on  itself.  Further,  the  price  of  the 
commodity  to  be  imported  (indigo)  was  many  times 
higher  than  normal,  so  that  the  goods  themselves  could 
scarcely  be  considered  as  safe  collateral  for  any  banker, 
even  though  the  parties  supplying  the  goods  were 
thoroughly  dependable. 

As  the  customers  were  very  eager  to  obtain  the  goods, 
and  were  not  in  a  position  to  import  on  their  own 
account,  the  importer  secured  the  assistance  of  an  inter- 
national banking  house,  which  issued  a  letter  of  credit 
in  favor  of  the  importing  house,  so  that  it  was 
merely  necessary  for  the  importer  to  pay  the  usual 
commission  to  the  bankers  for  their  services,  without 
himself  putting  up  any  capital.  The  goods  were,  of 
course,  held  in  trust  by  the  banking  house  while  being 
sold.  The  difference  between  the  import  price  and  the 
selling  price,  minus  the  banker's  small  commission,  was 
passed  on  to  the  importer  as  the  goods  were  delivered 
to  the  customers. 

The  quality  of  the  goods  was  guaranteed  to  the  cus- 
tomer by  the  importer,  but  in  order  to  save  any  delays 
and  to  avoid  any  risks  being  taken  by  the  banker,  the 
customers  were  induced  by  the  importing  house  to  sign 
an  agreement  to  the  following  effect — this  agreement 
to  be  held  bj^  the  banking  house: 

"As  we  are  desirous  of  facilitating  this  transaction 

we  agree  to  accept  delivery  on  arrival  and 

pay  for  against  domestic  bills  of  lading  ....  without 
any  question  as  to  quantity,  quality,  or  substance." 


300         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  What  seem  to  be  the  conditions  essential  to 
financing  a  purchase  of  goods  in  this  way? 

2.  Should  you  consider  it  desirable  for  a  medium- 
sized  business  concern  to  attempt  to  finance  directly 
the  purchase  of  materials  from  abroad?  Why  or  why  not? 

3.  Under  what  circumstances,  if  at  all,  is  it  finan- 
cially desirable  for  a  large  manufacturing  concern  to 
import  directly  the  goods  which  it  uses? 


CHAPTER  VII 

FINANCIAL  ASPECTS  OF 
PRODUCING  GOODS 

IN  many  kinds  of  manufacturing  it  is  no  easy  matter 
to  determine  the  exact  Cost  of  the  goods  pro- 
duced. Until  recently,  too  much  has  been  taken 
for  granted.  There  has  also  been  an  all  too  common 
assumption,  fostered  by  the  theoretical  economist, 
that  the  costs  of  production  can  be  more  or  less  in- 
definitely lowered  as  the  size  of  the  productive  unit 
increases.  Hence  many  exaggerated  claims  have  been 
made  for  the  large-scale  producer  and  the  horizontal 
or  vertical  combination  of  business  concerns. 

It  is  only  by  relating  the  production  program  of 
a  business  to  the  general  financial  program,  over  a 
considerable  period  of  time,  that  a  concern  can  hope 
to  be  successful.  The  exigencies  of  the  war  period 
have  directed  attention  to  the  possibilities  of  conserva- 
tion through  standardization,  elimination  of  waste, 
and  improved  efficiency  methods.  While  prices  were 
i^apidly  raising,  however,  business  profits  were  high. 
Many  unnecessary  items  of  expense  were  incurred,  and 
many  a  needless  expansion  of  fixed  assets  was  made. 
Very  frequently  the  selling  end  of  the  business  was 
able  to  bring  unwarranted  pressure  on  the  production 
department.  With  prices  falling,  the  very  concerns 
which  were  most  prosperous  on  the  upward  swing,  tend 
to  be  hardest  hit  by  the  depression.  Profits  are  now 
shrinking  into  deficits,  while  the  overhead  expenses  stub- 
bornly refuse  to  come  down.  As  it  should  be  the  aim 
of  every  well-conducted  business  to  reduce  its  costs  to 
the  minimum,  a  few  problems  bearing  on  some  of  the 
financial  aspects  of  producing  goods  are  here  given. 

301 


302  PROBLEMS  IN  BUSINESS  FINANCE 

A.     COSTS  AND  FINANCE* 

Exercise  III 

Problem  on  the  Relations  Between  the  Business  Cycle,  Costs 

of  Production,  Net  Profits,  etc. 

Select  three  industries  from  the  Census  of  Manu- 
factures, 1909,  for  each  of  which  the  total  value  of 
product  is  $100,000,000  or  more.  Tabulate  the  follow- 
ing data,  making  your  own  computations  whenever 
necessary : 

1.  Number  of  establishments. 

2.  Capital  invested. 

3.  Value  of  products. 

4.  Total  expenses. 

5.  Net  income. 

6.  Ratio  of  value  of  product  to  capital. 

7.  Ratio  of  net  income  to  capital. 

8.  Ratio  of  net  income  to  value  of  product. 

9.  Ratio  of  total  expenses  to  value  of  product. 

10.  Cost  of  services. 

11.  Cost  of  materials,  etc. 

12.  Miscellaneous  costs. 

13.  Ratio  of  cost  of  services  to  total  expenses. 

14.  Ratio  of  cost  of  materials,  etc.,  to  total  expenses. 

15.  Ratio  of  miscellaneous  costs  to  total  expenses. 

In  the  light  of  the  above  data — 

(a)  Explain  the  var3^ing  degrees  of  prosperity  en- 
joyed by  each  industry  at  the  end  of  1914,  1917 
and  1920. 

(b)  Compare  the  probable  financial  condition  of 
the  several  industries  at  these  same  dates. 

Source:  The  Thirteenth  Census  of  the  United  States,  1910,  Vol. 
VIII,  pages  518-537. 

Reference:  Mitchell,  Business  Cycles,  Chapters  x  and  xi,  pages 
452-511. 

Additional  suggestions:  Mitchell,  History  of  Prices  During  the 
War;  Review  of  Economic  Statistics;  Monthly  Labor  Review;  the 
various  financial  and  trade  publications. 

*There  are  no  specific  references  which  will  be  particularly  helpful 
in  connection  with  the  problems  in  this  section.  The  student, 
however,  is  referred  to  some  of  the  titles  under  Topics  VI  and  IX 
of  the  General  Bibliography.  Sammons',  Keeping  Up  With  Rising 
Costs  may  be  read  with  profit. 


COSTS  AND  FINANCE  303 

Problem  131 
How  Shall  the  Overhead  Be  Reduced? 

A  certain  business  in  1914  sold  100,000  units  for 
$1,000,000,  and  the  overhead  amounted  to  10  per  cent 
of  the  total  sales,  or  1100,000,  equal  to  one  dollar  for 
each  unit  of  sales  (approximate  figures  are  used.) 

The  increase  in  sales  during  the  war  boom  brought 
the  total  units,  in  1919,  to  200,000,  amounting  to 
$4,000,000,  and  the  overhead  still  remained  at  10  per 
cent  on  the  gross  sales  in  dollars,  or  $400,000,  equal 
to  two  dollars  on  each  unit  sold.  This  shows  a  large 
increase  in  overhead,  both  as  to  dollars  and  to  amount 
on  each  unit,  but  the  increase  in  prices  kept  pace  and 
not  only  allowed  this  increase  to  be  met,  but  showed 
a  more  than  satisfactory  margin  of  profit. 

The  present  year  will  show  a  drop  in  gross  sales  to 
approximately  150,000  units,  amounting  to  $2,250,000; 
and  the  overhead,  which  will  be  little  diminished  in 
total  dollars,  will  run  at  about  $350,000,  or  over  15 
per  cent  on  the  gross  dollars  of  sales,  and  at  the  rate 
of  2|  dollars  on  each  unit  of  sale.  This  shows  a 
substantial  increase  in  overhead  in  the  per  cent,  gross 
dollars,  and  the  unit  cost,  which  results  in  a  material 
inroad  into  the  net  earnings  for  surplus  and  profits. 

The  following  table  illustrates  the  situation: 

Sales  Dollar 
1914         1919         1920 

1.  Production 60%  50%  60% 

2.  Marketing 10%  8%  15% 

3.  Administration.  10%  10%  15% 

4.  Profit 20%  32%  10% 

Questions 

1.  How,  if  at  all,  could  this  situation  have  been 
prevented? 

2.  What  steps  should  now  be  taken  to  improve  the 
situation? 

(Reference:  The  Reduction  of  Merchandising  Expense,  published 
by  the  Chamber  of  Commerce  of  the  United  States,  April,  1921.) 


304  PROBLEMS  IN  BUSINESS  FINANCE 

Problem   13^ 

Reducing  ('osts  Through  Specialization 
IN  Production 

The Woolen   Company   was  a  relatively 

small  and  narrowly  owned  concern.  The  father,  who 
had  organized  the  business  and  who  had  managed  it 
with  a  reasonable  degree  of  success,  was  about  ready 
to  retire.  His  son,  who  had  gained  in  the  schools 
some  knowledge  of  cost  accounting,  decided  that  he 
could  make  a  real  success  of  the  business  by  finding 
out  the  type  of  goods  which  could  be  produced  at 
lowest  cost  and  then  turning  out  only  such  goods. 
Accordingly,  by  a  series  of  computations  he  discovered 
that  their  mill  would  incur  the  lowest  expenses  of 
operation  if  it  specialized  in  coarse  homespuns.  Not 
only  was  their  plant  of  such  a  sort  that  they  could 
make  this  material  more  cheaply  than  any  other,  but 
it  was  common  knowledge  that  this  kind  of  cloth 
was  usually  in  good  demand. 

Hence,  contrary  to  the  advice  of  his  father  as  well 
as  to  that  of  the  company's  selling  agent,  the  son 
turned  the  factory  into  making  this  one  product, 
which  theoretically  should  be  a  great  profit  maker. 

Questions 

1.  Do  you  think  this  company  was  well  advised 
in  attempting  to  make  only  one  fabric,  whereas  it  had 
previously  turned  out  several  fabrics  of  somewhat 
different  sorts? 

2.  Why  do  you  suppose  the  father  and  the  selling 
agent  advised  against  this  policy?  Do  you  agree 
with  their  advice? 

3.  What  do  you  expect  was  the  immediate  outcome 
of  this  change  in  poHcy?  Should  you  expect  the  ulti- 
mate outcome  to  be  different? 


COSTS  AND  FINANCE  305 

Problem  133 
Reducing  Costs  Through  Qitantity  Oittput  ^ 

The .._.  Textile  Mill  was  one  of  the  largest 

concerns  of  its  sort  in  the  country.  It  speciaHzed  in 
the  making  of  staple  cotton  goods,  depending  upon 
mass  production  for  its  profits.  However,  on  account 
of  the  large  original  investment  in  plant  and  equipment, 
the  company  was  from  the  beginning  hampered  by 
the  lack  of  adequate  working  capital.  Accordingly, 
for  several  years  it  had  been  forced  to  follow  the  "hand 
to  mouth"  policy,  taking  whatever  orders  it  could 
secure  and  running  them  off  as  speedily  as  possible. 
Along  with  this  they  frequently  experimented  in  mak- 
ing up  a  certain  quantity  of  staple  goods,  which  they 
were  then  forced  to  sell  at  the  immediate  market  price 
because  of  their  lack  of  funds.  As  the  business  was 
conducted,  the  plant  was  never  operated  at  more  than 
two-thirds'  capacity.  The  result  was  that  on  account 
of  the  very  large  fixed  assets,  the  unit  costs  of  operation 
were  unduly  high  and  the  company  was  never  able  to 
make  a  reasonable  return  on  the  investment,  in  spite  of 
the  hopes  with  which  it  had  been  originally  organized. 

Finally,  the  old  management  decided  to  give  up 
the  task  which  they  had  not  yet  been  able  satisfac- 
torily to  cope  with.  The  new  management  decided 
that  since  the  physical  equipment  was  so  satisfactory 
for  mass  production,  it  would  be  worth  while  to  find 
out  what  their  costs  would  be  provided  they  produced 
to  full  capacity,  as  no  attempt  apparently  had  hitherto 
been  made  to  approach  the  problem  in  this  way. 

With  the  new  unit  cost  as  the  basis,  it  was  reasoned 
that  there  would  be  good  ground  for  expecting  that 
this  company  could  undersell  practically  all  its  com- 
petitors. On  the  theor}^  that  nothing  could  now  be 
gained  without  taking  a  chance,  the  old  conservative 
policy  was  thrown  overboard  and  the  mill  was  operated 
at  full  capacity.  Thereupon  it  was  found  that  the 
unit  costs  were  very  much  lower  than  any  heretofore 
realized  by  the Company.     They  were, 


306  PROBLEMS  IN  BUSINESS  FINANCE 

in  fact,  so  low  that  there  was  no  difficulty  in  under- 
selling the  market  for  those  staple  goods. 

Questions 

1.  Do  you  think  that  the  new  management  followed 
the  correct  policy? 

2.  How  should  you  expect  this  policy  to  affect  (a) 
immediatel}^  and  (6)  ultimately 

(x)   The  finances  of  this  mill? 
iy)  The    finances    of    other    mills    engaged  in 
making  similar  products? 


Problem   134 
"Making  Money  at  a  Loss" — Selling  Below  Cost 

"What  the  United  States — the  world,  in  fact — wants 
today  is  not  alone  increased  production.  We  had  that 
during  the  war,  and  have  now  to  get  over  it,  because 
that  increase  was  brought  about  by  cost  increase. 
Our  necessity  now  is  an  increase  in  production  carrying 
with  it  a  decrease  in  cost.  Many  look  to  labor  to  give 
us  this;  but  such  an  increase  is  the  task  not  so  much 
of  labor  as  of  management.  There  is  more  production 
being  lost  right  now  through  lack  of  efficient  manage- 
ment than   there  is  through   lack  of  efficient  labor. 

Here's  an  instance:  Recently  I  visited  a  foundry 
where  the  product  varied  from  castings  weighing  less 
than  a  pound  to  those  weighing  several  tons.  Their 
production  was  worked  out  on  the  "average"  basis, 
with  ruinous  results,  as  you  will  quickly  see..  A 
molder  at  $9  a  day  working  on  small  castings,  does 
well  if  he  produces  250  pounds  of  castings  a  day. 


COSTS  AND  FINANCE  807 

Another  molder  at  the  same  wage,  but  working  on 
larger  castings,  may  easily  produce  1,750  pounds  of 
castings  a  day.  The  two  men  will  therefore  produce 
2,000  pounds  of  castings  for  an  average  labor  cost  of 
90  cents  per  100  pounds.  From  a  bookkeeping  stand- 
point that  figure  tells  a  true  story;  but  see  how  mis- 
leading it  is  when  applied  to  cost  as  a  basis  for  sale 
prices.  The  ^ibor  cost  for  the  small  castings  is  not 
90  cents  per  100  pounds  but  $3.60  per  100  pounds, 
while  the  labor  cost  in  the  large  castings  is  only  just 
over  a  half  of  90  cents  per  100  pounds.  Naturally 
when  the  foundry  quoted  on  a  basis  of  90  cents  per 
100  pounds  for  the  small  castings,  it  was  overwhelmed 
with  orders  for  those  castings  and  lost  $2.70  on  every 
100  pounds  weight  made.  At  the  same  time  it  lost 
all  business  in  the  heavier  castings,  because  its  quota- 
tions were  too  high." 

Questions 

1.  Should  costs  for  such  a  concern  be  computed  on 
the  "pound"  basis? 

2.  What  solution  can  be  suggested  for  the  apparent 
financial  difficulties  of  the  above  concern? 

3.  Under  what  circumstances,  if  any,  is  it  financially 
justifiable  for  a  producer  to  sell  below  cost  of  pro- 
duction? 


Problem  135 

Shoitld  the  Selling  Price  Be  Uniform 

Irrespective  of  Costs.^ 

It  is  reported  to  be  the  practice  for  some  makers  of 
knit  underwear  to  charge  the  same  price  for  all  sizes 
irrespective  of  cost,  the  only  distinction  made  being 
that  between  children's  and  adults'  sizes. 


308         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  From  the  financial  point  of  view,  what  should  you 
expect  to  be  the  results  of  this  policy? 

2.  Would  the  same  reasoning  apply  in  the  case  of  a 
concern  which  makes  men's  ready-to-wear  clothing 
and  follows  a  similar  policy?  In  the  case  of  a  custom 
tailor? 


Problem  13G 

Is  A  Concern  Well  Advised  in  Making  Some  Goods 

For  Which  the  Market  Is  Small? 

The  ...- -.  Company,  engaged  in  the  manu- 
facture of  various  kinds  of  machinery  accessories, 
produces  17,500  different  items,  many  of  which  have 
a  very  limited  sale.  The  president  of  the  company, 
feeling  that  the  turn-over  of  inventory  was  not  suffi- 
ciently rapid,  had  an  investigation  made,  whereupon 
he  discovered  that  600  items  out  of  the  total  accounted 
for  about  67  per  cent  of  the  annual  business.  It  w^as 
further  discovered  that  many  of  these  items  had  been 
manufactured  merely  to  suit  the  whims  of  particular 
customers  whose  business  it  was  thought  might  better 
be  kept  or  be  increased  by  this  practice.  In  other  in- 
stances, the  articles  had  been  manufactured  because 
certain  salesmen  had  found  them  easier  to  sell  than 
some  standard  lines.  Also  there  were  some  cases  in 
which  the  production  of  the  article  had  been  due  to 
the  salesmen's  trying  to  get  business  by  agreeing  to 
minor  changes  from  the  standard  products,  or  by 
urging  that  some  special  article  be  made  to  sell  along 
with  the  standard  line. 


COSTS  AND  FINANCE  309 

Questions 

1.  Do  you  approve  of  the  policy  which  led  to  the 
making  of  so  many  different  articles? 

2.  Would  it  now  be  good  financial  policy  to  reduce 
the  number  made? 

3.  From  the  point  of  view  of  the  producer,  as  well 
as  the  consumer,  what  financial  gains  or  losses  might 
result  from  the  policy  which  you  advise? 


Problem  137 
Ignorant  Competition,  Cost,  and  Failure 

The  President  of  the  _._ Company  en- 
gaged in  the  making  of  chemicals,  recently  said: 

"We  have  no  fear  of  inteUigent  competition.  In 
fact,  we  like  it,  for  it  helps  us  to  bring  our  own  busi- 
ness to  a  higher  degree  of  efficiency.  During  the  last 
two  or  three  years,  however,  the  competition  which 
we  have  had  to  face  has  been  of  an  unusual  sort,  rarely 
encountered  in  more  normal  times.  It  has  been  ig7io- 
rant  competition.  Many  concerns  have  been  started  by 
those  who  have  little  understanding  of  the  technicalities 
of  the  business,  whose  sole  aim  has  been  speedy  profits 
and  then  a  quick  'get-away.'  The  seHing  prices  of 
many  of  these  "competitors"  have  not  been  based 
upon  true  costs.  They  have  supplied  goods  at  almost 
any  price  which  would  enable  them  to  get  a  market. 
In  many  instances,  these  concerns  and  similarly  con- 
ducted ones  in  other  lines  of  industry,  have  sold  their 
goods  without  any  regard  to  the  present  or  the  future 
and  have  gone  on  with  this  reckless  competition  until 


310         PROBLEIVIS  IN  BUSINESS  FINANCE 

they  have  failed.  In  the  meantime,  they  have  worked 
untold  injury  to  the  soundly  managed  companies  fre- 
quently causing  them  also  to  fail.  Ignorant  competi- 
tion is  the  worst  possible  enemy  of  a  business." 

Questinna 

1.  To  what   extent'  do  you  agree  with  the  point  of 
view  expressed  by  this  manufacturer? 

2.  Do  you  believe  that   there  is   much   "ignorant" 
competition  of  the  sort  indicated. 

3.  Has  a  really  efficient  concern  anything  to  "fear" 
on  this  account? 

4.  Generally  speaking,  what  are  the  chief  financial 
advantages  of  competition, 

(a)  From  the  point  of  view  of  the  consumer  of 
the  goods; 

(b)  From  the  point  of  view  of  the  producer? 


Problem  138 

What  Epfect  Would  a  Reduction  in  the  Nl^mber  of 

Styles  Have  on  the  Cost  of  Prodttction? 

In  referring  to  the  wastes  in  industry,  it  was  asserted 
by  a  member  of  the  American  Engineering  Council's 
Committee  on  Elimination  of  W^aste  in  Industry  (the 
"Hoover"  Committee)  that  probably  the  greatest  single 
waste  in  the  industry  of  today  arises  from  the  change 
in  styles,  particularly  the  changing  styles  for  women. 

In  reply  to  this  charge  an  officer  of  the  Associated 
Dress  Industries  of  America  "came  back"  strongh^ 
as  follows: 


COSTS  AND  FINANCE  311 

Style  is  the  outstandiiiji  clcnuMit  which  makes  the  tex- 
tile iiuhistry  the  sch'oiuI  lai'f^est  in  tlii.s  eountry.  Clothinp: 
would  be  worn  if  it  possessed  no  style,  l)eeaiise  of  neeossity, 
but  it  is  style  which  creates  vohune  in  new  orders  every  sea- 
son, and  repeat  orders  always.  It  is  style  in  clothing  that 
gives  enip!oyniei^t  to  inindi-eds  of  thousands  of  well-paid 
workers;  it  is  style  in  clothing  that  i-uns  the  output  into 
billions  of  dollars  annually;  it  is  style  that  fills  factory 
lofts  with  millions  in  lentals  and  calls  for  huge  building 
l)iojects.  The  elimination  of  style  from  clothing  would  be 
ail  econon.ic  and  industrial  catastrophe. 

Q'uestw}is 

1.  P'rom  the  financial  point  of  view,  state  clearly 
your  reasons  for  agreeing  with  the  "Hoover  Com- 
mittee" on  this  point,  or  with  the  officer  of  the  Asso- 
ciated Dress  Industries. 

2.  In  your  answer  would  you  make  any  distinction 
between  the  immediate  and  ultimate  financial  effects 
of  a  possible  reduction  in  the  number  of  styles? 


Problem   139 

Thk  Posshjle  Financial  Gains  of  Greater 

Standardization  in  Production 

Qvestions 

1.  From  the  point  of  view  of  the  producer  and  of 
the  consumer,  what  appear  to  be  the  financial  gains 
of  greater  standardization  in   production? 

2.  Do  you  think  that  there  are  considerations  other 
than  financial  which  are  sufficient  to  justify  the  present 
lack  of  standardization? 


312         PROBLEMS  IN  BUSINESS  FINANCE 

B.    REDUCING  THE  COSTS  THROUGH  INCREASED 
SIZE— COMBINATIONS  HORIZONTAL  AND  VER- 
TICAL, AND  DEVELOPMENT  OF  SUBSIDIARIES 


References : 

Dewing,  Corporate  Promotion  and  Reorganizations,  546-576. 
Dewing,  Financial  Policy  of  Corporations,  Vol.  IV.,  3-68. 
Jenks  and  Clark,  The  Trust  Problem,  31-50,  198-216. 
Lincoln,  Central  Electric  Light  and  Power  Stations  {1917),  126-142. 
Van  Hise,  Concentration  and  Control,  8-166  (particularly  8-20.) 


Exercise  IV 
The  Financial  Economies  of  Size 

Group  a  number  of  reasonably  comparable  concerns 
engaged  in  the  same  line  of  industry  according  to  their 
size.  From  a  careful  analysis  of  their  significant 
financial  figures,  tr}^  to  discover  the  most  "profitable" 
size  of  industrial  unit. 

Suggested  reference:  Lincoln,  Central  Electric  Light  and  Power 
Stations,  126-142. 

Suggested  source  of  material:  Corporate  Earnings  and  Govern- 
ment Revenues  for  the  year  1917. 

The  various  corporation  manuals  as  well  as  some  of  the  other  ref- 
erences mentioned  in  the  bibliography  should  also  be  of  service. 


Exercise  V 
The  Financial  Results  of  Combinations  of  Various  Sorts 

Select  several  companies  in  a  given  line  of  industry 
which  are  the  result  of  combinations  of  smaller  units. 
Compare  the  financial  record  of  each  company  over  a 
period  of  years  after  the  combination  with  the  financial 
performance  of  the  constituent  companies  over  a  similar 
period.  Make  this  study  for  integrated  concerns  as 
well  as  for  those  which  are  horizontally  combined. 

Suggested  reference:  Dewing,  Financial  Policy  of  Corporations, 
Vol.  IV..  33-68. 

Suggested  sources:     The  corporation  manuals,  etc. 


THE  ECONOMIES  OF  SIZES  313 

Phomlkm    140 
Financial  Ai)\anta(jeh  ok  Sizk 

It  has  been  stated  that  some  small  makers  of  elec- 
trical appliances  can  produce  their  goods  at  a  lower 
price  per  unit  than  is  possible  in  the  case  of  large  con- 
cerns like  the  General  Electric  Company.  Similarly 
it  has  been  asserted  that  in  certain  lines  small  specialty 
paper  makers  can  produce  their  goods  more  cheaply 
than  a  large  concern  like  the  Dennison  Manufacturing 
Company  can  produce  them.  Other  examples  might 
be  given,  and  while  in  some  cases  this  may  be  mere 
assertion,  in  other  cases  it  has  been  definitely  proved 
to  be  true. 

Questions 

1.  Granting  the  truth  of  the  foregoing  statements, 
would  it  be  correct  to  say  that  it  is  financially  desirable 
for  industry  to  be  carried  on  under  conditions  of  small 
scale  production  whenever  it  is  found  that  the  unit 
costs  of  production  under  such  circumstances  are  less 
than  when  the  goods  are  produced  by  large  plants? 
Why  or  why  not? 

2.  Specifically,  what  are  the  financial  gains  or  losses 
arising — 

(a)  From  large  scale  production; 
(6)   From  the  combination  of  industries  engaged 
in  similar  lines  of  production? 


314  PROBLEMS  IN  BUSINESS  FINANCE 

Phoblkm    141 
Financial   Considkhations   Involved   in   Combinations 

Questions 

1.  Sum  up  all  the  important  considerations  which 
should  be  borne  in  mind  b}^  a  small  concern  which 
wishes  to  increase  its  profits  by  taking  over  one  or  more 
other  small  concerns  engaged  in  the  same  type  of 
business. 

2.  In  what  respects,  if  any,  would  different  consid- 
erations enter  in  if  the  plan  were  to  take  over  one  or 
more  concerns  engaged  in  difTerent  stages  of  the  same 
industry — for  example,  with  a  view  to  controlling  one 
of  the  sources  of  supply  or  one  of  the  channels  of  dis- 
tribution for  the  particular  industry? 


Problem  14'-2 
Financial  Advantages  of  the  Chain  Store 
Questions 

1.  What  particular  financial  gains,  if  any,  should 
you  expect  a  small  chain  of  retail  stores  to  have  over 
the  single  store? 

2.  Which  chain  of  stores  should  you  expect  to  be 
more  successful,  one  developed  by  buying  out  estab- 
lished stores  or  one  which  has  built  up  new  stores? 


Problem   143 
Financial  Problem  of  a  Department  Store 

Specifically,  what  are  the  financial   advantages  or 
disadvantages  of  the  small  department  store, 

(a)  As  compared  with  the  store  which  sells  only 
one  type  of  goods,  and 

(h)  As  compared  with  the  chain  stores? 


THE  ECONOMIES  OF  SIZES  315 

Phchlem    144 

Ckktain  Financial  Considerations  Involved 

In  the  Integration  of  a   Business 

The  A.  Press  Company  confines  its  operations 
largely  to  art  printing,  the  bulk  of  its  business 
being  the  preparation  of  high-grade  advertising 
material.  Experience  has  shown  that  its  business  is 
m.ost  active  in  periods  of  general  business  depression, 
though  in  times  of  prosperity  the  volume  of  business 
is  sufficiently  good.  However,  it  has  been  the  policy 
of  this  concern  to  build  up  its  plant  and  equipment 
on  the  basis  of  the  normal  amount  of  business  to  be 
expected  in  the  duller  periods,  and  to  work  on  double 
shifts  when  orders  are  heavy.  Further,  the  company 
does  not  attempt  to  do  any  general  printing  business 
or  even  much  of  its  binding.  This  sort  of  work  is 
really  incidental  to  the  business  of  art  printing,  and 
whenever  the  pressure  becomes  too  great  for  its  limited 
capacity  such  work  is  given  to  job  printers  of  different 
sorts.  Nor  does  the  company  employ  regularly 
artists  and  photographers  whose  services  are  from  time 
to  time  needed.  Rather  it  is  their  plan  to  hire  such 
persons  as  occasion  demands. 

The  B.  Press  Company  is  a  much  larger  organization 
engaged  in  the  general  job  book  printing  business.  It 
has  a  large  plant,  equipped  to  carry  on  every  phase  of 
printing  and  publishing.  In  addition  to  a  very  ex- 
tensive printing  plant  it  has  developed  an  unusuallj^ 
large  bindery.  On  account  of  the  scope  of  its  business, 
the  B.  Company  has  also  taken  over  a  small  textile 
mill  to  supply  the  cloth  used  in  binding.  The  balance 
of  the  mill's  output  is  sold  on  the  general  market. 

Qvestions 

1.  Which  policy  outlined  above  should  you  expect 
to  lead  to  the  greatest  financial  success? 

2.  Do  you  think  it  would  be  wise  for  both  of  these 
companies  to  follow  the  same  policy?     Why? 

3.  Which  company  should  you  expect  to  have  the 
fewer  financial  difficulties  in  1921? 


316  PROBLEMS  IN  BUSINESS  FINANCE 

Problem   145 

Possible  Financial  Gains  of  Vertical  Combination 

OR  "Integration" 

Many  engineers  have  cited  the  Ford  plant  in  Detroit 
as  an  outstanding  example  of  efficiency  in  production, 
due  to  large  scale  operations.  The  Ford  Company 
has  until  recently  been  engaged  solely  in  the  making 
of  cars  and  parts.  About  the  first  of  1921  Ford  is  said 
to  have  stated  that  it  was  his  ambition  to  "dig  his 
automobiles  out  of  the  ground."  In  other  words,  he 
planned  to  develop  an  integrated  business,  which 
would  control  metal  and  coal  mines  and  forests,  for  the 
supply  of  raw  material,  and  even  some  railway  facilities 
for  transporting  raw  materials  and  finished  product. 
Thus  he  hopes  still  further  to  reduce  his  costs  of  produc- 
tion and  the  price  of  his  car  to  the  consumer. 

Question 
1.  In  what  ways,  or  to  what  extent,  can  the  unit  cost 
of  the  product  be  lowered  through  vertical  combination, 
that  is,  the  linking  up  under  one  management  of  con- 
cerns engaged  in  successive  stages  of  a  given  industry? 


Problem  146 

The  Development  of  Subsidiary  and 

Affiliated  Companies 

1.  What  appear  to  you  to  be  the  advantages  or 
disadvantages,  from  the  financial  point  of  view,  in 
developing  separately  financed  subsidiary  companies 
for  carrying  on  the  accessory  and  by-product  produc- 
tion for  the  parent  industry? 

2.  Do  you  see  any  gains  to  be  secured  from  having 
the  selling  or  purchasing  branch  of  a  business  organized 
separately  from  the  production  end  of  the  business? 

3.  Is  it  a  wise  financial  policy  for  a  company  to 
own  affiliated  businesses,  one  or  more  of  which  may 
be  operated  at  a  loss,  mierely  for  the  purpose  of  keeping 
competitors  out  of  the  field? 


CHAPTER  VIII 


FINANCIAL  ASPECTS  OF  SELLING  GOODS 

References: 

Beebe,  Retail  Credits  and  Collections. 
*Cherington,  Advertising  as  a  Business  Force,  3-28,  47-67,  380-460. 

Credit  Man's  Diary  (passim.) 

*Duncan,  Marketing,  Its  Problems  and  Methods,  225-247,  448-468. 
*Ettinger  and  Golieb,  Credits  and  Collections  (passim.) 

Mercantile  Credits  (Ronald  Pre.ss  Company.) 

IT  has  not  been  customary  in  general  books  on 
Finance  to  give  much  attention  to  the  financial 
aspects  of  selling  goods.  Just  as  the  purchasing 
and  production  activities  of  a  business  have  usually 
been  thought  of  as  largely  separate  from  the  general 
financial  programme,  so  the  credit  man  and  the  sales 
department  have  been  customarily  passed  by.  The 
former  has  frequently  been  considered  a  necessary  evil, 
pa^rticularly  by  the  sales  department,  while  the  latter, 
with  little  understanding  of  finance,  has  attempted  to 
make  itself  the  most  important  part  of  the  business. 

Great  are  the  economic  and  financial  wastes  resulting 
from  the  wholly  unwarranted  attempts  to  stimulate 
demand  for  goods.  Many  a  business  has  been  wrecked 
by  its  sales  department,  particularly  within  the  last 
few  years  when  the  unhealthy  pressure  of  easily 
secured  orders  has  led  to  greatly  increased  plant 
capacity.  "Over-selling "  may  be  an  even  more  serious 
financial  crime  than  "over-buying."  Only  by  a  proper 
financial  coordination  of  all  the  branches  of  a  business 
can  real  and  lasting  success  be  attained.  Hence  in 
the  following  problems  brief  attention  is  given  to 
some  of  the  more  obvious  financial  aspects  of  selling 
goods. 

317 


318  PROBLEMS  IN  BUSINESS  FINANCE 

A.     GENERAL  PROBLEMS  OF  THE 
CREDIT  DEPARTMENT 

Prohlk.m   147 
Stan'dahus  For  Credit  Crantin(; 

The  credit  manager  of  a  large  manufacturing  con- 
cern illustrates  some  of  his  problems  as  follows: 

The  business  in  iiiiiul  produces  a  ^reat  variety  of 
inanut'actiireci  poodis,  .-ome  of  which  are  sold  to  every  line 
of  trade,  from  "shoe  col^bler"  to  a  "million  dollar  concern" 
of  any  kind.     The  usual  teinis  of  sale  are  "net,  30  days." 

The  principles  of  Credit  approval  are  built  around  three 
different  thinjis,  viz.:  " Charactei',"  "Capacitv,"  and 
"Capital." 

The  application  of  thes(>  principles  varies,  naturally,  in 
comformity  with  thv  nature  of  the  business  to  which  they 
ai'e  applied. 

It  would  take  "volumes"  to  explain  in  detail  all  the 
po.ssibilities  of  the  above  combination  of  words,  but  a  few 
concise,  actual  casea  in  poini,  will  serve  to  give  one  a  clear 
idea  upon  which  to  work. 

The  illustrations  which  follow  show  the  result  of  judg- 
ment, and  in  them  will  also  be  seen  "discrimination." 

Character 
Company  A. — This  concern  is  rated  ovei'  one  hundred 
thousand  dollars,  "high,"  but  is  on  a  "cash-in-advance" 
basis.  AVhy?  Because  their  policy  is  to  take  cash  discount 
regardless  of  whether  it  is  allowable.  In  other  words,  they 
lack  "character"  in  their  dealings  and  are  not  a  desirable 
credit  risk. 

Company  B. — Here,  the  opposite  is  true.  This  company 
is  rated  at  less  than  ten  thousand  dollars,  l)ut  we  credit  as 
high  as  two  thousand  dollars  at  one  time — a  strong  "moral" 
i':"sk. 

Capacity 

('oMPANY  C. — A  very  large  corporation  with  many  millions 
of  capital, — passed  through  a  financial  crisis  lecently,  which 
was  caused  by  a  lack  of  proper  management  or  capacity. 
The  "  Personnel "  of  the  concern  has  been  completely  changed 
and  it  is  again  in  good  credit  standing.  Full  confidence  is 
placed  in  the  new  organization. 

Company  D.— Has  capital  rating  of  only  .D;5,0C0  to  $35,C00. 
They  have  a  great  "capacity"  for  "cjuick  turnover."    Put- 


MERCANTILE  CREDIT  310 

chase  nearly  two  thonsaiul  do'lars'  worth  every  nior.th  ar.d 
pay  eich  hill  at  maturity.     No  fear  of  faihire  luM-e. 

Capital 

Company  E.— It  is  rated  f.W.OOO  to*7r),(M)(M)ut  third-j^rade 
credit.  This  eoncern  is  sold  for  "eash"  only.  Although 
unquestionable  in  regard  to  "chai'aeter,"  there  is  ahvays  a 
lack  of  "capital"  to  carry  the  an.ount  of  business  done, 
and  this  tends  al>o  to  show  a  lack  of  "capacity."  These 
are  sure  signs  of  ultimate  failure  and  credit  men  shoj.ld  be 
forewarned . 

CoMP.^.NY  F.— This  is  rated  $35,000  to  .S50,';00  (first-grade 
credit).  Just  the  opposite  to  the  preceding  account. 
Plent.v  of  capital  to  successfully  cai'ry  on  the  lousiness. 
They  are  sold  as  high  as  a  thousand  dollai's  at  a  time  and 
payments  are  made  promptly  on  maturity  dates. 

Qtiestions 

1.  Should  you  consider  it  desirable  for  the  credit  man 
of  this  concern  to  follow  more  definite  rules  in  his  credit 
granting  than  are  here  indicated?  For  example,  would 
it  be  a  wise  plan  for  him  to  limit  the  amount  of  credit 
to  a  certain  fixed  proportion  of  the  capital,  net  worth, 
or  current  assets  of  the  customer? 

2.  Would  your  answer  differ, 

(a)  If  the  concern  granting  the  credit  were  re- 
latively small? 

(6)   If  the  business  were  not  so  widely  diversified? 

3.  Indicate  clearly  the  essential  differences  and  simi- 
larities between  "mercantile"  credit  and  "commercial" 
or  bank  credit. 


320         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  148 
The  Credit  Policy  and  the  Business  Cycle* 

The  following  statement  of  the  policy  followed  in 
a  particular  case  was  submitted  by  the  credit  manager 
of  a  large  and  prosperous  manufacturing  concern, 
which  sells  to  many  thousands  of  small  customers, 
the  average  yearly  orders  being  less  than  S300  per 
customer : 

This  customer  has  piirchasetl  goods  fiom  us  since  1914. 
Dui-ing  that  year  and  1915,  which  were  better  known  as 
"slump  years,"  we  extended  credit  for  this  company's 
entire  requirements  in  our  line,  which  often  were  as  high  as 
$200  at  a  time.  It  was  a  very  active  account  with  ten  or 
twelve  chaiges  a  month.  The  teinis  of  sale,  however,  were 
never  observed,  as  payments  weie  made  from  90  to  120 
days,  instead  of  at  the  3C-day  period  as  they  should  have 
l)een.  This  cjuestion  was  often  discussed  with  the  customer, 
but  we  wei"e  unable  to  educate  him  so  that  he  might  show 

*The  following  cautions  are  particularly  suggestive  in  this  connection : 

We  have  congratulated  ourselves,  and  rightfully  so,  in  preventing 
heavy  failures  through  cooperative  action.  Banking  and  merchandise 
creditors  have  exerted  a  tremendous  force  in  this  direction.  It  is  true 
that  numerous  failures  have  occurred  lately,  greater  in  number  than  in 
former  years,  but  the  total  in  dollars  and  cents  does  not  by  any  means 
represent  what  would  have  been  the  failure  toll  had  not  cooperation 
prevailed.  All  honor  to  the  men  who  have  stood  the  task  at  and  done 
their  work  well. 

Throughout  the  country  there  is  still  a  large  sum  of  frozen  credits 
representing  receivables  that  cannot  be  thawed  out  at  once.  Improve- 
ments will  depend  upon  the  warming  rays  of  a  new  summer  sun. 

Let  us  not  deceive  ourselves  in  the  present  situation.  Thanks  to 
cooperation  much  has  been  done,  but,  in  truth,  only  the  beginnings  have 
been  made  and  complete  success  in  the  operation  will  not  come  until 
the  thawing  out  process  is  accomplished.  The  granting  of  new  credits, 
when  we  have  such  a  large  sum  in  a  frozen  condition,  demands  unusual 
care  and  discretion.  The  credit  manager  must  be  saved  from  self- 
deception.  He  must  have  constantly  in  mind  the  deferred  receivables, 
and  base  his  present  calculations  for  new  credits  on  the  sum  that  he  is 
carrying  and  what  is  perfectly  safe  for  him  in  his  new  credits  to  under- 
take. 

The  situation  suggests  largely  a  marking  of  time,  no  great  chances 
taken  in  one  direction  or  the  other  until  the  thawing  time  arrives.  The 
usual  skill  of  the  credit  manager  must  be  exercised  in  an  unusual  manner 
these  days,  and,  granted  the  proper  attitude  and  discreet  action,  liquidity 
in  credits  will  eventually  come,  and  that  which  is  now  frozen  will  have 
passed  once  again  into  circulation.  The  frozen  credit  is  something  that 
the  credit  manager  must  watch  over  so  that  there  will  be  no  chipping 
away  of  the  block  to  the  hurt  of  the  creditor's  interests,  and  the  volume 
of  liquid  will  finally  represent  the  frozen  equivalent.  Cenernl  Letter 
No.  11,  May  1,  192i,  National  A.ssociation  of  Credit  Men. 


MERCANTILE  CREDITS  321 

improvement  in  this  direction.  We  needed  business,  how- 
ever, during;  those  years,  so  we  continued  to  strugfj;le  with 
the  account. 

As  we  got  well  alons  into  the  year  of  1910,  which  was  the 
beg  nning  of  better  times,  we  made  our  requests  upon  him 
more  urgent  for  prompt  payments,  with  the  same  results  as 
formerly.  So  we  finally  told  him  that  he  would  be  required 
to  pay  cash  in  advance  for  anything  that  he  might  wish  in 
our  line.  This  was,  of  course,  a  severe  blow  to  him,  and  we, 
of  course,  ran  the  chances  of  entirely  losing  his  business.  As 
a  matter  of  fact,  this  is  just  what  we  were  hoping  would 
happen,  since  this  year  as  well  as  the  four  which  followed 
were  "Seller's  Market "  years.  Our  plant  was  so  overloaded 
with  work  that  we  could  not  begin  to  take  care  of  our  first- 
class  credit  customers,  and  to  solicit  new  businss  was  out 
of  the  question.  One  of  the  ways  therefore  that  we  had  in 
which  to  work  out  of  the  difficulty  was  to  appl}'  the  knife  to 
undesirable  and  doubtful  credit  risks. 

Today  the  times  are  entirely  different.  Business  is  scarce 
and  hard  to  get.  We  are  obliged  to  assume  risks  that  are 
doubtful.  This  very  account  that  we  turned  down  a  few 
years  ago  was  reopened  on  our  regular  terms  only  this 
month,  with  the  understanding  that  we  will  supply  goods  to 
the  amount  of  the  former  ci'edit  level  on  our  regular 
terms  of  thirty  days  net.  This  Company  has  not  made 
any  great  advancement  during  the  years  of  prosperity, 
but  it  has  managed  to  hold  its  own  and  show  some  slight 
improvement . 

Question 
Show   clearly   your   reasons   for   approving   or   dis- 
approving of  the  policy  above  outlined. 


Problem   HO 
The  Small  Concern  and  the  Mercantile  Agency 

The ..: Company  has  been  quietly  and 

soundly  built  up  by  one  man  who  is  still  the  dynamo 
of  the  business  and  the  sole  owner.  From  a  beginning 
of  a  few  hundred  dollars  the  concern  has  grown  until 


322  PROBLEMS  IN  BUSINESS  FINANCE 

its  net  worth  is  more  than  $200,000.  All  bills  are 
promptly  paid  and  very  little  is  borrowed  from  the 
banks. 

This  concern  has  been  repeatedly  approached  by 
representatives  of  a  standard  mercantile  agency  for 
information  which  would  enable  them  to  give  it  a 
satisfactory  i-ating.  The  proprietor,  however,  has 
always  taken  the  position  that  inasmuch  as  the  busi- 
ness is  solely  owned  by  him  and  always  takes  its  dis- 
counts and  never  troubles  anyone  for  credit,  there  is 
nothing  to  be  gained  from  having  its  financial  position 
made  public  property.  Consequently  he  has  refused 
to  give  the  usual  information  regarding  his  financial 
affairs  to  this  agency.  The  agency  accordingly  has 
given  him  a  "third-grade"  credit  rating  in  view  of  the 
fact  that  the  owner  would  give  out  no  information 
regarding  his  business. 

Qnestions 

1.  Is  it  desirable  that  a  closely  owned  concern  be 
"rated"  by  the  mercantile  agencies, 

(a)  From  the  point  of  view  of  the  concern  itself? 

(b)  From  the  point  of  view  of  the  creditors  of 
the  concern? 

2.  Was  it  justifiable  under  the  circumstances  for 
the  mercantile  agency  to  give  this  business  a  "third- 
grade"  rating? 

3.  What  appear  to  be  the  advantages  or  disad- 
vantages of  the  standard  mercantile  reports, 

(a)  From  the  point  of  view  of  the  "rated" 
concern? 

(6)  From  the  point  of  view  of  the  creditors  of 
the  concern? 

4.  Should  you  expect  the  same  advantages  or  dis- 
advantages to  exist  in  the  case  of  the  various  trade 
credit  agencies? 


MI'^RCANTILE  CREDITS  823 

Thp:  Abusk  ok  ('uKi)iT  Intki{(Ha\(;k 

"No  bureau  for  credit  interchange  can  rightly  be 
conducted  with  more  than  one  purpose  in  view.  When 
a  bureau  takes  the  information  gathered  through  inter- 
change and  sells  it,  or  a  service  based  upon  it,  then  we 
have  an  abuse  of  confidence.  The  interchange  loses  its 
original  constructive  and  protective  sides  and,  becom- 
ing commercialized,  takes  its  information  to  destroy 
credit.  .  A  bureau,  getting  through  the  interchange 
department  unfavorable  information,  may  use  that 
information  to  force  a  debtor  into  a  still  weaker  con- 
dition. The  bureau  may,  unless  a  claim  it  has  be  paid, 
threaten  to  expose  the  weakness.  The  result  may  be 
putting  the  man  out  of  business — when  intelligent  care 
might  have  saved  him. 

An  agency  wrote  a  debtor  as  follows  :^ — 

'We  are  checking  credits  for  nearly  4,000  manufacturers 
and  jobbers.  You  failed  to  pay  an  aecoL'nt  of  ...  .  for  $.  .  . 
This  will  necessitate  an  adverse  report  to  our  credit  depart- 
ment and  the  placing  of  claim  with  local  attorney.  Wire  if 
remitting;  save  costs.'  " 

(System,  April,  1921,  p.  521.) 

Questions 

1.  Do  you  agree  with  the  point  of  view  above 
expressed? 

2.  What  seem  to  you  to  be  the  reasons  for  the 
exchange  of  credit  information?     The  objections  to  it? 

3.  Do  you  approve  of  the  above  letter?     Why? 


324  PROBLEMS  IN  BUSINESS  FINANCE 

Pkohlk.m    1.>1 

Is    ('kKDII      l\TKK(HAN(iI':    DePKM)  A  MLK? 

The  following  statement  appeared  recently  in  a  house 
organ : 

A  certain  cntciprisinti;  incicluwit  has  a  chain  of  a  dozen 
stores.  He  houjiht  rather  iil)erally  last  year  and  was  dis- 
appointed in  his  sales.  As  a  result  he  is  having  considerable 
difficulty  in  payinu;  his  ))ills;  but  he  had  been  a  g;ood  custoniei- 
and  his  creditors,  wiiile  they  leahze  that  he  is  in  difficulties, 
do  not  want  to  see  him  ^o  to  the  wall.  They  are  not  in- 
clined to  ship  nioiv  p;oods  to  him,  but  ai'c  distinctly  willinji 
that  sonu'one  els(>  shiji  him  floods  that  he  may  continue  in 
business,  get  on  his  feet  again,  and  l)uy  from  them  later  on. 
So  when  he  gives  tluMi'  names  as  icference  they  all  report 
him  paid  up,  and  thi>  information  would  normally  find  its 
way  into  a  I'epoit. 

The  Letter  of  the  National  Association  of  Credit  Men 
sent  out  in  June,  1921,  comments  as  follows  upon  the 
above  statement: 

The  n;an  who  wrote  this  stor>"  has  just  awakened  fi'om  a 
(juarter  century  sleep.  In  the  early  nineties  a  story  citing 
these  circumstanc(>s  might  have  i'(>ceived  credence,  Now, 
however,  nobody  will  accept  it.  Tlu!  impression  at  once  is 
that  the  purpose  wa-  1o  sell  some  kind  of  service.  Wv 
([uestion  absolutely  its  accuracy  as  icllecling  present-day 
conditions  in  cre(ht  intcMchange,  foi'  nowadays  no  cnnlit 
managei',  and  ceitainly  no  group  of  them,  would  be  so  foolish 
as  to  falsify  theii-  information.  Th(\v  know  that  the  lie 
would  be  discovered  ciuickly  and,  when  discovered,  would 
not  only  bi'ing  discredit  ui)on  them  but  eliminate  them  from 
that  reciprocal  ciedit  sei-vice  which  has  been  established 
among  credit  men  who  have  confidence  in  each  other. 

It  is  most  unfortunate  that  anyone  should  try  "to  put 
over"  a  story  of  this  kind.  Accuracy  and  faithfulness  in  the 
interchange  of  ledger  expei'iences  can  be  almost  absolutely 
depended  upon  in  the  relations  between  credit  guarantoi's. 
No  credit  depaitment  could  survive  the  circulation  of  a  lie. 
No  house  could  survive  that  founds  its  work  on  mere 
expediency,  or  which  defends  itself  from  losses  by  resort  to 
the  falsification  of  information. 

The  reading  of  this  story  will  fill  credit  grantors  to  a  man 
with  feelings  of  indignation.  They  could  not  be  satisfied 
until  they  have  branded  it  as  absolutely  false  and  misrepre- 
sentative  of  present  conditions. 


MERCANTILE  CREDITS  325 

Questions 

1.  In  the  light  of  your  knowledge  of  business  con- 
ditions do  you  believe  that  the  statement  of  the  house 
organ  is  true,  or  do  you  agree  with  the  view  expressed 
by  the  National  Association  of  Credit  Men? 

2.  Can  you  think  of  any  reason  why  the  house  organ 
should  have  distorted  the  facts? 

3.  Have  you  any  reason  for  believing  that  the 
National  Association  of  Credit  Men  has  misrepresented 
the  situation? 


Problem  ].i'-2 
Extending  Credit  on  the  Financial  Statement* 

A  credit  man  who  not  long  ago  asked  a  corporation 
of  Carson  City,  a  brand  new  customer,  for  a  financial 
statement,  received  the  following  reply: 

Gentlemen: — In  regard  to  your  re(iuest  for  a  statement, 
would  sa3'  that  we  have  just  made  a  financial  statement  to 
the  commercial  ajoencies  and  ho^  to  refer  you  to  them  for 
same. 

^'ery  truly  yours, 

Corporation. 

*The  importance  of  the  "intangible"  faetors  in  mercantile  credit 
granting  is  illustrated  hy  the  following  interesting  episode: 

"This  party,  whom  we  will  call  Jones,  was  proprietor  of  a  general 
store,  had  been  a  customer  for  fifteen  years,  knew  every  head  man  in  the 
concern,  was  an  important  man  in  his  community,  held  local  offices, 
was  a  prominent  church  worker,  had  been  for  several  years  the  superin- 
tendent of  the  biggest  Sunday-school  in  his  town.  He  owed  the  house 
in  question  in  amounts  running  from  .SSOO  to  .S3, 000,  and  was  generally 
and  all  along  had  been  a  very  satisfactory  payer,  but  here  was  the  credit 
man  returning  from  his  trip  recommending  that  Jones  be  cut  off  from 
any  further  accommodations. 

"Natiu-ally,  this  aroused  prompt  and  vigorous  protest,  for  the  credit 
man  was  unable  to  set  forth  any  such  specific  reasons  for  cutting  out 
Jones'  account  as  in  the  other  cases  cited.  He  had  not  learned  that 
Jones  drank  or  gambled  or  had  fallen  into  any  pernicious  habits,  could 
not  find  that  he  had  been  keeping  irregular  hours,  that  he  had  l)een 


32()  PHOBLKMS  IN  BUSINESS  FINANCE 

The  credit  man  was  not  at  all  suspicious  in  the  matter 
and  naturally  wished  at  this  time  to  gain  as  much 
dependable  business  as  possible.  Accordingly,  he 
wrote  the  connnercial  agencies  for  the  rating  and  state- 
ment  of   the   Corporation.     Their   statement 

showed  a  net  worth  of  $61,000,  as  follows: 

Assets 

Merchandiso $35,000 

Cash 3,000 

Accounts  Roccival)le 0.000 

Real  Estate 10,000 

Machines 5.000 

Fixtures 3,000 

$62,000 
Liabilities 
Owing  for  Merchandise 1,000 

$61,000 

On  the  strength  of  this  statement  the  credit  man 
passed  an  order  for  $600,  and  goods  were  shipf^ed  to 
the Corporation. 

inattentive  to  business,  that  he  had  an  extravagant  wife  or  a  spend- 
thrift son,  yet  the  credit  man  stoutly  maintained  that  something  was 
wrong  with  Jones,  that  he  was  no  longer  a  safe  credit  risk.  He  had  spent 
three  of  four  days  in  the  little  town  on  the  pretense  that  he  was  taking 
a  few  days  of  enforced  vacation  because  of  ill  health,  had  seen  him  in 
his  store,  had  l)een  introduced  at  his  house,  had  observed  him  in  his 
relation  to  his  family,  and  had  satisfied  himself  that  there  was  some- 
thing wrong,  something  amiss.  He  found  that  the  very  clerks  in  the 
Jones  store  had  an  air  as  if  something  were  impending,  and  he  wanted 
his  house  to  cut  Jones  off. 

"The  principal  adviser  of  the  house,  who  acted  as  court  of  last 
resort  in  cases  of  dispute,  ol)jected  to  the  acceptance  of  the  credit  man's 
advice  in  the  case  of  Jones,  declaring  that  he  had  known  Jones  person- 
ally for  foiu'teen  years,  that  Jones  had  paid  them  thousands  of  dollars 
and  would  jjatronize  them  for  years  to  come.  He  said  that  within 
the  past  three  months  Jones  had  spent  a  Sunday  with  him  as  his  guest, 
had  accompanied  him  to  churcli,  and  addressed  a  Bible  class  acceptably, 
and  that  he  must  be  a  man  of  the  highest  type  of  character  and  his 
credit  must  not  be  curtailed,  but  his  wants  supplied  to  the  limit.  This 
was  the  final  decision  of  the  house,  and  it  was  not  weakened  when  the 
credit  man  acknowledged  that  Jones  had  1^18,000  to  .$20,000  of  good 
assets  and  could  show  a  net  worth  of  from  .$11,000  to  $12,000  and  none 
of  his  accounts  with  the  house  was  past  due. 

"It  was  five  months  later  that  the  morning  papers  contained  a  racj' 
elopement  story  of  a  country  merchant  named  Jones  who  had  quietly 
converted  liis  ])ropertv  into  ca.sh,  tlcserted  his  wife  and  skif)ped  to 
Canada  with  the  family  servant  girl  with  whom  he  had  been  enamored 
for  some  time  past,  this  information  of  course  being  followed  with  the 
usual  comments  on  the  alleged  tendencies  of  church  leaders." — Credit 
Monthly,  March,  1921,  2o(J-7. 


MERCANTILE  CREDITS  327 

Questions 

1.  Should  the  credit  man  have  been  satisfied  with 
the  above  statement?     Why? 

2.  Should  he  have  shipped  any  goods  on  the  strength 
of  the  above  statement?     Why  or  why  not? 

3.  What  do  you  expect  was   the   outcome   of   this 
transaction? 


Problem  158 
The  Statement  and  the  Business  Cycle 

"It  is  to  be  remembered  that  after  the  period  of 
unwise  and  inflated  buying,  the  man  who  faces  the 
facts  is  the  best  risk,  and  also  it  is  to  be  remembered 
that  he  is  likely  to  show  the  worst  statement,  for  he  will 
have  marked  his  whole  inventory  down  to  the  market. 

This  is  no  time  for  collection  agency  methods  and 
threats;  the  big  thing  is  not  to  get  the  money  at  all 
costs  but  to  get  business  back  to  normal  with  the  fewest 
possible  number  of  capable  people  being  hurt  in  the 
process:  There  is  a  difference  between  a  collection 
agency  and  a  credit  department." 

Question 

Do  you  think  that  a  "bad  statement"  may  "indicate 
a  good  risk,"  either  from  the  point  of  view  of  granting 
mercantile  credit  or  bank  credit? 


328  PROBLEMS  IN  BUSINESS  FINANCE 

Problem   1.')4 
Easy  Crkdit  (iRANTixc;  and  Low    Df.ht  Lossros 

The  credit  manager  of  a  large  merchandising  house 
wrote  as  follows  some  three  years  ago: 

When  I  tell  n'oh  that  pi-acticall}'  none  of  our  husiiicss  is 
for  cash,  hut  thtit  most  of  it  is  on  thirty  days'  time,  you  may 
think  that  ether  the  strain  on  me  is  terrific  or  that  I  have 
unusual  facilities  for  {jettiiifi  ci-edit  infoi'mation. 

On  the  conti-ary,  I  am  ([uite  (>asy}i<)infi;.  as  a  rule.  I  pass 
practically  all  oideis  from  ncnv  customers  even  thouj>h  I  can 
fiet  no  information  on  them  from  tiie  credit  agencies.  I'll  tell 
you  how  I  came  to  take  this  attitude  on  extending  credit. 

When,  years  a^o,  I  started  in  as  ci'edit  man  for  this  con- 
cern— we  sell  coffee  to  retailers — I  would  not  pass  a  new  order 
unless  it  looked  iron-chid.  I  laid  j^reat  stress  on  credit 
I'atings  and  net  worth,  and  felt  that  it  was  up  to  me  to 
thi-ow  eveiy  safeguard  that  I  could  around  an  order. 

After  a  few  months'  expei-ience  I  made  two  startling  and 
discouraging  discoveries.  One  was  that  an  ordei-  from  a 
new  account  had  only  about  a  50-50  chance  of  passing  me — 
that  made  me  unpopular  with  everyone  in  my  concern. 

But  the  other  cUscovery  hurt  me  even  more,  foi'  it  was  so 
unlocked  for;  it  was  that,  of  the  orders  I  passed,  the  ones 
that  went  bad  were  as  often  as  not  those  which  had  stood 
up  best  under  my  scrutiny. 

Often  I  found  that  a  history  of  years  of  prompt  pay,  good 
ratings  by  the  agencies,  first-class  references,  and  a  satis- 
factory net  worth,  did  not  keep  a  customer  from  failing  to 
pay.     I  mulled  over  these  facts  and  came  to  a  conclusion. 

It  was  the  simple  one  that  if  all  s'gns  failed  sometimes,  as 
they  seemed  *o,  I  might  as  well  pass  any  order  that  did  not 
look  bad  on  the  surface.  But  before  jumping  in  over  my  head 
I  decided  to  test  my  theory  out  on  several  hundred  orders. 

These  I  took  as  they  came,  pi'ovided  no  order  was  for  goods 
worth  more  than  .$50,  and  passed  it  blird  if  there  w^ere  no  un- 
favorable i-eports  on  it.  I  did  not  care  about  ratings  or  prop- 
erty, nor  did  I  look  for  unusually  good  past  performances. 

Exactly  9S  per  cent  of  thes(>  new  accounts  were  paid  for 
in  reasonably  good  time;  2  per  cent  were  wiitten  off.  And 
that  is  a  ratio  that  I  find  holds  true  with  us. 

(System,  Novomber,  1919,  page  665,  ff.) 

Questions 

1.  Do  you  believe  that  the  policy  now  followed  by 
this  credit  man  is  a  sound  one? 


MERCANTILE  CREDITS  329 

2.  Do  you  believe  that  a  similar  policy  would  be 
safe  for  all  types  of  concerns?     At  all  times? 

3.  How,  if  at  all,  should  you  expect  this  easy  credit 
granting  policy  to  be  supplemented  in  order  to  insure 
no  greater  losses  from  bad  debts? 

4.  What  is  your  opinion  of  this  credit  man? 

5.  Should  you  expect  him  to  handle  his  credits  in  a 
similar  manner  in  1921? 


Pkoblkm  155 

Guaranteeing  the  Account  by  Officers  of 

THE  Buying  Concern 

"It  is  true  that  men  of  standing  hesitate  to  accept 
personal  liability  in  corporate  matters,  but  if  the  matter 
is  presented  to  them  in  the  proper  light  very  frequently 
such  guarantees  can  be  arranged.  One  very  successful 
argument  is,  "How  can  you  expect  us  to  take  the  risk, 
if  you  who  are  in  control  of  the  corporation's  affairs  are 
unwilling  to  take  the  risk?"  'And  it  is  a  fact  that  if  a 
responsible  individual  has  control  of  the  destiny  of  a 
corporation  and  is  unwilling  to  loan  that  corporation 
strength,  after  assuring  the  seller  that  the  bills  will  be 
promptly  paid,  as  long  as  he  is  connected  with  it,  it  is 
no  fit  subject  for  a  credit  man  to  take  a  chance  on." 

Question 
Is  the  argument  above  presented  a  sound  one? 


330  PROBLEMS  IN  BUSINESS  FINANCE 

I'UOIJLKM     \')V} 

Does  Kasv  Mkucwtii.k  CuKDir  ("msk  Hktail  Faiuhks? 

Commercial  agencies  give  the  following  causes  for 
the  majority  of  failures: 

Incompetence,  inexpei'ience,  lack  of  capital,  unwise 
granting  of  credits,  speculation  outside  of  regular  busi- 
ness, had  habits,  personal  extravagance,  fraudulent 
disposition  of  property. 

Very  little  attention,  however,  appears  to  be  given 
to  the  fundamental  causes  of  failure.  A  careful  study 
of  retailing  methods  in  this  country,  in  England  and  in 
France,  together  with  a  study  of  the  successes  and 
failures  of  individual  concerns,  leads  to  the  conclusion 
that  the  fundamental  causes  of  failure  in  the  retail 
business  in  this  country  are  due  to  dishonesty,  lack  of 
preparation,  and  expanded  credit,  with  which  may  he 
coupled  too  much  capital.  A  national  trait  in  this 
country  is  for  people  to  do  things  about  which  they 
know  the  least.  The  farmer  who  makes  money  on  the 
farm  goes  to  the  city  or  village  and  buys  or  starts  a 
store  and  in  this  way  loses  his  money.  The  man  who 
makes  money  in  the  city  goes  to  the  country  and  buys 
a  farm,  only  to  find  it  a  permanent  source  of  loss.  In 
the  end,  too  nmch  capital  causes  more  failures  than  lack 
of  capital.  As  a  matter  of  fact,  the  writer  has  never 
been  able  to  find  a  single  case  where  lack  of  capital  has 
caused  a  failure  of  a  retailer.  What  has  been  called 
lack  of  capital  was  merely  an  expanded  credit. 

If  the  history  of  those  retail  businesses  who  have 
been  in  existence  for  forty  years  or  more  be  studied,  it 
will  be  found  that  nearly  every  one  of  them  was  estab- 
lished by  men  who  lacked  capital.  They  were  so  limited 
in  regard  to  credit  and  capital  they  had  to  watch  every 
penny  to  make  it  go  just  as  far  as  was  possible. 

Questions 

1.  Analyze  critically  this  point  of  view. 

2.  Do  you  agree  that  "what  has  been  called  lack  of 
capital  is  merely  expanded  credit"? 


CREDIT  AND  SALES  DEPARTMENTS         331 

3.  Do  you  agree  as  to  the   fundamental   causes  of 
retail  failures? 

4.  What  constructive  suggestions  can  you  make  as 
to  methods  of  granting  retail  credit? 

5.  In  principle,  is  the  extending  of  "dealer"  credit 
sound  or  unsound? 


B.     RELATIONS  BETWEEN  CREDIT  DEPART- 
MENT AND  SALES  DEPARTMENT 

Problem   157 

Shall  the  Credit  Man  Antagonize  His  Salesman 

And  Turn  Down  a  "Sure  Pay"  Customer? 

Mr.  X  is  a  storekeeper  in  a  small  country  town.  He 
is  one  of  the  wealthiest  men  of  the  community,  having 
large  outside  interests  and  lending  a  good  deal  of  money 
to  the  surrounding  farmers.  Exclusive  of  his  stock  of 
goods,  store  building,  and  the  like,  he  is  probably 
worth  at  least  $100,000.  He  has  practically  no  liabili- 
ties of  any  kind,  is  a  leader  in  the  community,  and  an 
exceptionally  high  moral  risk. 

In  1920  and  1921  the  farmers  in  this  community 
suffered  greatly  from  the  drop  in  prices  and  were 
disposed  to  purchase  nothing  but  absolute  necessities. 
When  Mr.  X  was  beginning  to  be  worried  about  his 
small  amount  of  sales,  a  clever  salesman  managed  to 
convince  him  that  the  reason  for  his  low  sales  was  that 
his  stock  of  goods  was  largely  out  of  date  and  not  kept 
in  first-class  condition.  The  salesman  explained  that 
by  laying  in  a  large  new  stock  an  appeal  could  be  made 
to  the  buyers,  who  now  might  be  unable  to  pay  cash, 
but  whose  credit  in  the  long  run  undoubtedly  would  be 
good.  Finally,  therefore,  Mr.  X  agreed  to  buy  $25,000 
worth  of  new  stock  which  will  presumably  be  sold  on 


332  PROBLEMS  IN  BUSINESS  FINANCE 

long  credits,  and  the  salesman  in  turn  offered  to  grant 
exceptionally  long  terms. 

Mr.  X  has  now  been  convinced  that  he  needs  this 
additional  amount  of  goods  and  that  customers  will 
want  them.  There  is  no  question  about  his  solvency, 
and  little  doubt  that  the  selling  company  will  receive 
payment  in  due  time. 

Questions 

1.  Did  Mr.  X  act  wisely  in  agreeing  to  these  new 
purchases  at  such  a  time? 

2.  Was  the  salesman  well  advised  in  urging  Mr.  X 
to  buy  so  extensively? 

3.  If  you  were  the  credit  manager  of  the  wholesale 
house  wishing  to  sell  to  Mr.  X,  how  would  you  pass 
on  this  order? 

4.  What  do  you  think  would  be  the  nature  of  the 
future  relations  existing  between  Mr.  X  and  the  sell- 
ing house  if  the  order  is  passed? 

(Referenre:     System,  July,  1921,  p.  37,  ff.) 


Problem  158 

CooPKRATioN  Between  the  Sales  and 

Credit  Departments* 

The  credit  manager  of  a  large  manufacturing  concern 
writes  as  follows  regarding  his  handling  of  the  credit 
problem : 

I  now  have  my  salesmen  workino  in  such  harmony  that 
for  a  CO  iple  of  years  hack  I  luive  not  found  it  necessary  to 
keep  a  "turn-down"  record.  The  only  accounts  which  it 
is  necessary  to  turn   down   come   from   new   sak^smen   who 

*The  following  {)oints  may  well  ho  borne  in  mind: — "Can  a  man  sell 
a  firm's  credit  policy  while  selling  its  goods?"  "No,"  says  one  execu- 
tive; another  says,  "Why  not?  Our  men  do."  Every  one  of  our  sales- 
men is  a  self-constituted  credit  man.  A  half-way  observant  salesman 
can  get  the  information  right  in  the  course  of  his  sales  talk.  "Suppose, 
for  instance,  that  the  salesman  is  calling  for  the  first  time  on  a  retailer. 
Say  the  retailer  is  a  hardware  dealer.  The  salesman,  walking  in  and 
glancing  around  the  store,  can  see  many  things  that  are  pertinent  to 


CREDIT  AND  SALES  DEPARTMENTS        333 

liavfMi't  (|uil('  cauji,!!!  (lie  idea.  'I'hc  salcsiucn  inakinj!;  the 
jircatcst  amounts  of  money  are  the  men  who  also  liave  the 
fewest  losses  amonji  their  aeeounts.  This  is  proof  enouf>;h 
that  assisting  the  erecUt  tlepartmenl  does  not  mihtate  against 
commissions.  The  whole  thing  is  in  getting  everybody 
around  to  the  same  viewpoint. 

:i:  :1:  *  :1:  *  ■■f  ■'.-  ■'.■ 

I  send  the  men  on  the  road  complete  reports  concerning 
their  customers  and  the  state  of  theii'  accounts.  If  there  is 
a  dispute  or  trouble  threatened,  I  i-efei-  it  to  the  salesmen  in 
the  territory  to  get  on  the  job  rather  than  write  directly  to 
the  customer — tiie  salesman  has,  and  I  have  not,  an  inti- 
mate personal  knowledge  of  the  situation. 

I  never  turn  down  an  ordei-  witliout  finding  out  what  the 
sa  esman  has  to  say  about  the  debtor.  If  the  salesman's 
report  differs  fi-om  the  repoi'ts  of  the  agencies,  or  from  the 
report  of  a  local  attorn(\v,  I  go  over  the  matter  with  h  m  and 
try  to  fintl  out  who  is  right,  .\fter  looking  at  all  the  facts, 
it  is  very  rare  that  the  salesman  and  I  fail  to  agree  on 
whatever  action  we  happen  to  tike. 

I  do  not  ask  my  salesmen  to  be  "in(iuisitive."  I  would 
rather  that  they  did  not  ask  for  any  kind  of  a  statement 
from  the  customer  unless  they  are  absolutely  certain  that 
the  statement  will  be  willingly  forthcoming  and  is  made  out 
of  a  desire  to  keep  the  ciedit  line  in  good  condition. 

In  the  case  of  a  new  account,  the  salesman  is  expected  to 
turn  in  a  report  which  includes  a  financial  statement  and 
two  or  three  references,  with  his  pei'sonal  opinion. 

(System,  July,  1917,  p.  40,  ff.) 

credit.  On  the  shelves,  for  instance,  he'll  see  somebody's  paints. 
There's  a  lead  to  be  reported  to  the  credit  man  in  the  home  office.  In 
the  show  cases  he'll  see  somebody's  cutlery  and  some  other  concern's 
tools,  and  on  the  floor  he'll  see  some  firm's  wringers  and  another  manu- 
facturer's lawn  mowers.  There  are  more  leads.  A  general  size-up 
of  the  store  will  tell  the  salesman  pretty  accurately  just  what  sort  of 
merchandiser  the  retailer  is.  "But  specifically,"  I  asked,  "ju.st  what 
is  a  salesman  to  look  for'?"  "Tliese,"  said  Sir.  Meriam,  "are  some 
sound  suggestions:  First — Who  is  the  manager  of  the  business,  and  is 
he  a  capable  man'?  Second — W'liat  is  the  policy  of  the  concern  in  meet- 
ing local  ol)ligations'?  Third — Is  it  an  old  established  concern,  or  a 
new  enterprise?  Fourth — What  is  its  local  reputation?  Fifth — Does 
the  concern  carry  a  large  or  small  stock  of  gooils,  and  is  the  stock  in  good 
condition;  or  would  it  be  subject  to  depreciation  if  placed  on  the  market 
at  a  forced  sale"?  Si.xth — To  what  class  of  traile  does  the  concern  cater? 
Seventh — Is  the  concern  up-to-date  in  its  methods?  Eighth — What 
condition,  such  as  crop  shortages,  strikes  and  the  like,  would  have  an 
effect  upon  the  business  of  the  concern?  Ninth — From  what  other 
manufacturers  and  wholesalers  does  the  concern  buy  goods,  and  on 
what  terms?  Tenth — Taking  all  matters  into  consideration,  what  is 
your  opinion  of  the  concern  as  a  credit  risk'? — .\dapted  from  Biishiess, 
May,  1921,  page  20. 


334         PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Do  you  approve  of  the  extent  to  which  "cooper- 
ation" is  carried  in  this  concern? 

2.  From  the  point  of  view  of  the  concern  itself 
would  it  be  possible,  or  at  any  rate  desirable,  to  carry 
cooperation  between  the  sales  and  credit  departments 
to  this  extent  in  all  lines  of  industry? 


Problp:m   15!) 
"Putting  It  Up  to  the  Salesman" 

A  salesman  of  the  .  .  .  Company,  on  his  monthly 
rounds,  discovers  that  the  business  operated  by  one  of 
his  former  customers  has  recently  changed  hands, 
without  the  knowledge  of  the  concern  which  he 
represents.  The  new  management  has  agreed  to 
continue  business  on  the  old  terms  granted  to  their 
predecessors  and  they  wish  to  buy  a  large  order  on 
credit. 

The  salesman  is  in  doubt  as  to  what  policy  he  should 
follow.  Accordingly,  he  telegraphs  to  his  firm  for 
instructions  and  receives  word  that  the  credit  man  is 
away  for  the  day.  His  assistant  replies,  however,  that 
if  everything  looks  all  right  he  sees  no  harm  in  taking  a 
chance  on  the  order.  By  the  time  this  reply  is  received, 
the  salesman  has  been  advised  by  two  banks  and  several 
business  men  that  they  would  not  extend  credit  to  the 
new  management,  even  to  the  extent  of  ten  dollars. 

Question 
What   course   would   you   advise   the   salesman   to 
follow  under  these  circumstances? 


CREDIT  AND  Ir^ALEtS  DEPARTMENTS        3:^5 

I'UOHMOM     l(i() 

TiiK  N'aluk  of  Rkkkkkncks  Skctkioi)  in'  tiik  Salksman 

Brown,  a  salesman  for  the  .  .  .  Company,  was  a 
very  kind-hearted  individual  who  disliked  to  do  any- 
thing which  would  offend  his  customers,  many  of  whom 
had  come  to  be  close  personal  friends.  His  firm  had 
been  having  some  difficulties  in  collections  and  had 
decided  that  they  must  exercise  more  care  in  granting 
credits.  Accordingly,  he  had  received  instructions  to 
the  effect  that  more  than  the  usual  caution  should  be 
exercised  in  the  opening  of  new  accounts,  and  it  would 
be  necessary  to  secure  several  responsible  references 
before  credit  would  be  extended  to  a  new  customer. 

Brown,  with  his  usual  civility,  approached  a  pro- 
spective customer  apologetically,  as  follows: 

"By  the  way,  Mr.  Ben,  our  credit  man  has  been 
getting  a  little  grouchy  and  insists  that  we  send  in 
several  references  regarding  the  financial  standing  of 
new  customers  before  goods  will  be  shipped  on  credit. 
Of  course,  you  understand  that  I  am  not  concerned 
about  this  little  thing  and  don't  want  to  bother  you, 
but  to  keep  the  office  in  good  humor  I  shall  have  to 
send  in  a  few  names.  Suppose  you  let  me  have  the 
names  of  a-  few  of  your  friends  who  will  put  in  a  good 
word  for  you,  if  our  credit  man  wishes." 

Questions 

1.  Did  this  salesman  follow  the  proper  policy? 

2.  Did  the  credit  office  follow  the  right  policy? 

3.  How  might  dependable  credit  information  be 
secured  without  offending  the  new  customer? 


336  PROBLEMS  IN  BUSINESS  FINANCE 

PUOHLK.M     Hil 

Relation   Hktwkkn  Tiik  (uedit  Risk  and  thk 
Mktiiod  of  Payin(;  Salesmen 

How  should  you  expect  the  credit  experience  of  the 
concern  whose  salesmen  sell  on  straight  commission  to 
compare  with  that  of  the  concern  whose  salesmen 
receive  a  stated  salary?     Why? 

(Reference:     Printer's  Ink,  April  7,  1921,  page  6.^ 


Problem   1  (5-2 

Should  the  Credit  Department  Tolerate  "Irrec;ular" 

Terms  of  Sale  Given  By  the  Salesman? 

Jones,  of  the  .  .  .  Company,  was  a  very  energetic 
salesman  and  proud  of  the  record  which  he  had  made 
in  the  past.  As  business  conditions  became  rather 
unsettled  toward  the  end  of  1919,  his  firm  informed 
him  that  in  the  future  no  special  concessions  of  any 
sort  would  be  made  to  customers.  Heretofore  Jones 
had  been  in  the  habit  of  giving  a  slight  extra  discount 
or  a  few  days  extra  time  to  desirable  customers,  and 
because  of  the  large  business  which  he  secured  his 
company  had  tolerated  the  practice. 

Shortly  after  the  new  ruling  had  been  passed,  Jones 
was  asked  by  one  of  his  biggest  customers  for  the  usual 
"extra"  time,  and  was  given  to  understand  that  the 
order  would  be  placed  elsewhere  unless  this  concession 
were  made.  Jones  wished  to  make  the  sale,  but  not 
caring  to  assume  the  responsibility  of  losing  this 
particular  customer,  wired  his  house  to  find  out  if  they 
would  be  willing  to  make  the  concession  in  this  case. 

Questions 
1.  Was  the  earlier  policy  of  Jones'  company  a  wise 
one?     The  later  policy? 


CREDIT  AND  SALES  DEPARTMENTS        337 

2.  Did  Jones  follow  the  correct  policy? 

3.  What  effect  do  you  think  his  policy  would  have — 

(a)     On  his  company? 
(6)     On  his  customer? 

4.  How  should  you  expect  the  selling  house  to  reply 
to  his  telegram? 


Problplm  1  fi8 
How  Far  Should  the  Salesman  I^e  Thisted? 

"The  signs  of  retrogression  are  too  well  known  to 
an  experienced  salesman  to  require  much  comment. 
The  office  observes  them  in  the  merchant's  falling 
behind,  in  failing  to  take  discounts,  in  irregular  pay- 
ments, in  paying  on  account,  or  in  checks  returned  from 
the  bank  marked  'no  funds.'  But  these  indications, 
while  evidence  of  poor  management  and  a  signal  to 
'slow  down,'  are  not  in  themselves  conclusive.  A 
customer  may  have  invested  heavily  in  bonds,  or  in 
real  estate,  and  for  the  time  being  put  himself  in  a  tight 
place  financially.  Or  he  may  be  doing  too  much  busi- 
ness for  his  capital.  In  such  cases,  it  is  not  always 
advisable  to  shut  off  a  man's  credit,  at  least  not  until 
after  you  have  looked  into  the  matter  with  some  race. 

In  1907,  during  the  money  stringency,  it  was 
reported  by  the  credit  agencies  that  a  big  New  York 
department  store  was  in  a  tight  place.  Immediately 
those  manufacturers  who  had  been  selling  the  store 
began  to  apply  the  brakes.  The  more  cautious  refused 
point  blank  to  give  another  cent's  worth  of  credit. 
But  there  was  one  corset  manufacturer  who  refused  to 
be  stampeded  by  the  report  and  asked  the  salesman  on 


338  PROBLEMS  IN  BUSINfciSS  FINANCE 

the  territory  to  look  into  the  matter  before  taking 
summary  action. 

It  so  happened  that  this  particular  sale.sman  was  of 
the  type  that  believed  in  representing  his  house  first, 
and  selling  goods  secondly.  Times  without  number  he 
had  shown  his  whole-hearted  interest  in  the  general 
welfare  of  the  business  by  sending  in  tips,  which  in 
several  cases  had  enabled  the  firm  to  avoid  a  loss.  So 
the  credit  department  felt  safe  in  putting  the  whole 
matter  up  to  the  salesman  and  leaving  it  for  him  to 
decide  whether  or  not  the  account  should  be  closed  out. 

The  salesman  got  on  the  job  at  once,  and  after 
doing  some  clever  'gum  shoe'  work  learned  that  the 
store  in  question  had  plenty  of  money,  but  that  it  was 
tied  up  in  the  construction  of  some  new  buildings. 
With  this  information  in  his  pocket  the  salesman  went 
to  the  manager  of  the  store  and  said : 

'I  know  that  other  corset  manufacturers  have  shut 
down  on  you.  I  have  also  found  out  that  you've  got 
money,  but  it  is  tied  up.  We'll  sell  you  all  the  mer- 
chandise you  want  and  give  you  an  extension  of  time, 
but  you  will  have  to  pay  interest.'  " 

(Quoted  from  Aspley,  What  a  SalesmTi  Should  i'\.7iow  About  Credit, 
pp  47-49.) 

Questions 

1.  Discuss  critically.  Did  the  salesman  follow  a 
correct  policy? 

2.  Would  you  approve  of  the  same  policy  under 
similar  conditions,  in  1921? 


DEALER  COOPERATION  339 

C.     COOPERATION  WITH  THE  CUSTOMER 

Problem  164 
Dealer  Cooperation 

An  example  of  what  a  credit  department  can  do  in 
the  way  of  constructive  dealer  help  is  furnished  by  the 
"Business  Service  Department"  of  the  M.  &  S.  Co.  of 
Brooklyn,  N.  Y.,  which  sells  varnish  to  the  hardware 
trade  and  general  stores. 

This  company  has  "a  business  department"  under  the 
control  of  the  credit  manager.  The  object  of  the  depart- 
ment is  to  help  dealers  in  the  conduct  of  their  business,  by 
advice  and  counsel;  to  avoid  their  going  backward;  to 
help  them  escape  the  coui'ts;  to  avoid  losing  their  money; 
in  short  by  suggestion  and  personal  assistance  to  help  make 
succe-!sful  merchants. 

The  aim  of  the  ilepartment  is  to  help  educate  the  dealers 
wherever  a  weakness  is  evident,  to  analyze  the  weakness 
and  serve  the  proper  nourishment.  The  dealer  who  can  be 
educated  to  give  "service"  as  an  important  oljject  in  his 
business  makes  a  far  better  credit  risk. 

The  cretUt  manager  can  best  teach  those  principles  that 
go  to  make  up  the  right  sort  of  merchant. 

The  salesmen  locate  the  customers  who  need  the  service 
of  the  department.  The  salesmen  aie  provided  with  printed 
forms  which  contain  on  them  ninety-five  different  points  by 
which  a  business  could  be  affected.  The  salesman  through 
talks  with  the  customer  learns  the  weaknesses  of  his  business 
methods  and  checks  these  on  the  form  provided  and  mails 
it  to  the  house.  The  case  may  be  taken  up  either  by  mail 
or  by  personal  visit  of  the  ci'edit  nmnager  where  possible 
or  by  the  salesman. — Most  of  the  work  done  and  advice 
given  by  the  department  is  in  the  matter  of  accounting, 
credits,  buying  and  selling,  insurance,  taxation  and  legal 
matters. 

{BulleHn,  National  Association  of  Credit  Men,  .January,  1G15,  pp. 
9-10.) 

Questions 

1.  Do  you  see  any  real  gain  from  the  point  of  view 
of  the  M.  &  S.  Co.  in  carrying  cooperation  to  this  extent  ? 

2.  Would  the  answer  which  you  give  apply  to  other 
types  of  concerns? 


340         PROBLEMS  IN  BUSINESS  FINANCE 

3.  Just  how  much  do  you  expect  the  customers  to 
gain  through  this  pohcy? 

4.  To  what  extent  do  you  consider  that  the  relation 
between  the  seHing  house  and  the  purchaser  is  analogous 
to  the  relation  existing  between  the  bank  and  its  com- 
mercial borrowers? 


Problem   16.5 

Financial  Cooperation  Between  Dealer 

And  CisTOMER 

The  W.  Rubber  Company  does  an  annual  business  of 
more  than  $30,000,000  of  which  about  75  per  cent  is  in 
rubber  footwear  and  allied  lines,  while  the  remainder 
consists  of  rubber  tires.  In  the  footwear  part  of  their 
business  for  the  year  1920  there  were  sales  of  about 
$7,000,000  to  15,000  retail  customers.  The  balance  of 
nearly  $17,000,000  worth  of  goods  was  sold  to  about  100 
jobbers.  About  90  per  cent  of  the  tire  sales,  or  nearly 
$8,000,000,  was  made  to  4,000  retail  customers.  The 
tire  business  of  this  concern  is  relatively  very  recent, 
having  been  de\'eloped  largely  within  the  last  three  or 
four  years. 

For  nearly  twenty  years  this  compan^y  has  been  a 
strong  believer  in  dealer  cooperation.  In  order  to 
help  their  customers  toward  better  financing,  as  well  as 
to  protect  themselves,  they  have  gradually  developed 
a  corps  of  traveling  auditors,  who  periodically  examine 
the  finances  of  those  concerns  which  buy  from  them. 
These  auditors,  or  "traveling  credit  men,"  in  the  case 
of  jobbers  are  sent  directly  from  the  home  office.  For 
the  retail  customers,  however,  auditors  are  sent  from 
the  thirty  or  more  branch  offices  which  manage  the 

tail  trade. 


DEALER  COOPERATION  341 

The  dealer  cooperation  is  carried  to  such  an  extent 
through  this  method  that  the  majority  of  the  customers 
now  feel  slighted  unless  they  receive  their  periodic 
audits,  although  there  was  earlier  a  good  deal  of 
opposition.  Further,  the  company  makes  every 
attempt  to  train  its  customers  in  the  best  methods  of 
financing.  Even  though  they  may  be  in  serious  finan- 
cial difficulties,  if  they  appear  to  be  honest  and 
attempting  to  do  the  right  thing  by  their  creditors, 
every  assistance  is  extended. 

According  to  the  records  of  this  concern,  it  appears 
that  the  sales  of  footwear  during  the  past  twenty  years 
have  been  $200,000,000,  with  a  bad  debt  loss  of  only 
S10,000.  The  average  loss  from  bad  debts  in  business 
of  similar  types  is  at  least  one-half  of  1  per  cent, 
frequently  much  higher.  In  the  year  1919,  however, 
the  tire  sales  of  $6,500,000  showed  a  bad  debt  loss  of 
$31,000. 

Questions 

1.  Does  the  above  case  indicate  that  cooperation  of 
this  sort  "pays"  in  dollars  and  cents? 

2.  How  do  you  account  for  the  much  larger  bad 
debt  losses  in  the  tire  business? 

3.  Analyze  critically  the  pros  and  cons  of  the 
situation. 


Problem   166 

Educating  the  Customer  to  Buy  Light 

And  Take  Losses  Early 

"With  prices  falling,  the  people  who  sell  at  all  are 
bound  to  sell  at  a  loss  or  without  profit.  If  they  have 
not  accumulated  a  surplus  during  the  rising  market, 
they  will  naturally  be  short  of  money  and  will  dread  the 
selling  at  a  loss.     They  will  want  to  hold  their  goods 


342  PROBLEMS  IN  BUSINESS  FINANCE 

until  the  market  turns— they  will  be  in  the  position  of 
the  speculator  who  is  always  hoping  that  if  he  only 
holds  on  long  enough  he  will  get  out  of  the  hole  in 
which  he  finds  himself. 

We  know  from  experience  that  although  one  may 
now  and  again  in  the  stock  market  succeed  in  winning 
out  by  delay,  the  expert  trader  takes  his  loss  early.  It 
is  easier  to  hold  a  share  of  corporate  stock  through  a 
period  than  it  is  to  hold  a  stock  of  goods;  the  average 
stock  of  goods  held  until  the  market  price  goes  up  is 
apt  to  be  worthless.  So  it  is  for  the  benefit  of  all 
hands  that  losses  be  taken  quickly;  the  best  means  to 
this  end  is  firm  collecting.  The  profits  in  a  declining 
market  are  to  be  made  by  the  quick  turning  of  stocks — 
a  turning  of  them  before  the  price  has  had  a  chance  to 
go  down.  This  quick  turning  cannot  be  made  without 
quick  collections  all  around  so  that  the  rapidity  of 
turnover  may  extend  through  every  operation  in  the 
process  of  manufacture  and  distribution. 

The  danger  of  advocating  quick  collections  is  that 
the  quickness  may  be  overdone  and  the  collector 
become  panic-stricken  and  thus  force  a  quite  unneces- 
sary loss.  Panic  is  most  infectious  and  utterly 
destructive  of  orderly  trade.  On  the  other  hand, 
personal  contact  and  an  explanation  of  the  necessity 
for  turning  swollen  inventories  into  money  may  be 
used  further  to  strengthen  the  position  of  the  customer. 
It  can  be  shown  that  the  collections  are  being  made  in 
the  interest  of  the  buyer  as  nmch  as  of  the  seller  and 
that  it  is  all  a  part  of  the  necessary  readjustment  to 
the  lines  of  normal  business. 

This  also  involves  a  responsibiUty  on  the  part  of 
the  seller;  it  is  not  fair  business  to  load  up  a  customer 
with  a  large  stock  of  goods  on  long  credit  on  the  asser- 
tion that  by  thus  buying  he  will  save  paying  higher 
prices  that  are  later  and  most  mysteriously  going  to 
come  about.  That  is  not  only  encouraging  speculation, 
but  is  in  a  class  with  selling  fake  mining  stocks  on  the 
pretense  that  they  will  fetch  fortunes  if  only  they  are 
held  long  enough.     It  should  be  the  duty  of  the  seller 


SALES  POLICIES  843 

to  expect  his  customer  to  make  money  on  the  selling  of 
what  he  buys  and  not  on  speculating  in  it." 

(System,  January,  1921.) 

Question 
Specifically,  what  are  the  financial  disadvantages  of 
"over-selling"  a  customer? 


D.     SALES  POLICIES 

Problem  167 
Seasonal  Datings 

Many  concerns  which  manufacture  goods  for  which 
there  is  a  seasonal  demand,  make  a  business  of  dating 
their  sales  ahead,  that  is,  they  will  endeavor  to  get 
orders  in  December,  for  example,  for  goods  which  will 
not  have  a  market  until  spring.  Having  received  the 
orders,  they  proceed  to  make  up  the  goods  and  deliver 
as  soon  as  possible.  The  accounts  rendered,  however, 
call  for  payment  at  some  future  time  when  the  sale  of 
the  goods  will  be  active.  For  example,  a  season  dating 
for  goods  thus  ordered  in  December  might  be  April  1st 
or  May  1st.  This  means  that  the  usual  cash  discount 
would  be  given  for  payment  within  10  days  from  the 
future  date,  or  that  the  ordinary  cash  terms  will  prevail 
from  this  date. 

Question 
1.  What  seem  to  you  to  be  the  advantages  or  dis- 
advantages arising  from  this  practice — 
(a)  In  the  case  of  the  producer? 
(h)   In  the  case  of  the  purchaser? 

(Reference:     Ettinger  and  Golieb,  72-74.) 


344  PROBLEMS  IN  Bl  SINP:SS  FINANCE 

Pl{()BLK.M     1()8 

Prsiii.\(;  Sales  \i\   \   jici.i)  Metih  d 

"When  business  began  to  limp  last  summer  (1920), 
the  .  .  .  Petticoat  Company  found  itself  much  in  the 
same  situation  as  most  other  concerns  in  the  ready-to- 
wear  garment  trade.  It  was  anything  but  a  pleasant 
situation. 

The  house  was  stocked  to  the  ceiling  with  piece- 
silk  goods,  most  of  which  had  been  bought  at  prices 
far  above  the  current  market.  Orders  had  practically 
stopped  coming  in.  Only  depression  talk  was  heard  as 
to  the  future.  How  the  situation  was  going  to  develop 
was  fairly  obvious.  Watching  it  develop  would  not 
help.  Plants  were  slowing  down.  Prices  were  going 
down. 

Then  the  ....  Petticoat  Company  took  a  position 
which  called  for  considerable  pluck.  Instead  of  slowing 
down,  as  its  neighbors  were  mostly  doing,  this  concern 
put  its  factory  on  double  time." 

(Printer's  Ink,  March  3,  1921,  page  2r>,  ff.i 

The  company  used  its  own  trade-mark  and  made  up 
no  goods  for  the  job  or  lot  trade.  The  main  appeal  was 
direct  to  the  retailer.  The  company  did  not  wait  for 
orders,  but  went  out  to  get  them.  They  bought  more 
silk  at  low  prices  even  before  their  old  supply  was  used 
up.  They  determined  to  cut  the  wholesale  price  when- 
ever necessary  to  get  the  business. 

Questio7is 

1.  Do  you  think  the  .  .  .  Company  was  well 
advised  in  following  this  increased  production  policy 
at  a  time  when  its  inventories  were  so  large  and  sales 
seemed  to  be  stopping? 

2.  What  steps  should  you  expect  the  .  .  .  Com- 
pany to  take  in  order  to  make  a  financial  success  of  this 
policy? 

3.  WTiat  do  \'ou  suppose  was  the  outcome  of  their 
unusual  policy? 


SALES  POLICIES  345 

4.  Are  there  gains  other  than  financial  to  be  derived 
from  such  a  pohcy? 

5.  Should  you  expect  that  a  similar  policy,  if  gener- 
ally followed,  would  lead  to  financial  success? 


Problkm  160 
"One  Cent"  Sales 

The  Rexall  Stores  frequently  put  on  a  "one  cent" 
sale,  that  is,  two  articles  are  sold  for  the  price  of  one 
plus  one  cent. 

Questions 

1.  In  the  long  run  what  do  you  expect  to  be  the 
financial  gains,  if  any,  from  following  such  a  policy? 

2.  When  should  you  consider  it  most  advisable  for 
a  retail  establishment  to  have  such  a  sale?      Why? 

3.  Can  you  lay  down  any  principle  as  to  the  type 
of  retailer  who  might  profitably  use  this  method  ?    ■ 


Problem  170 
The  Turnover  and  Business  Profits* 

"The  aim  of  all  business  concerns  is  to  obtain  the 
largest  possible  net  return  on  the  capital  employed. 
There  are  reallj"  only  three  factors  which  effect  net 
return:     1.  Gross  profit.     2.  Expenses.     3.  Turnover. 

*The  following  example  is  illuminating  on  this  subject: — "Offers  to 
the  merchant  of  special  prices  on  large  orders  have  been  productive 
of  short-sightedness  in  buving,  and  accounts,  in  manv  instances,  for 
large  stocks  of  goods  that  fail  to  move  from  the  shelves.  Only  one  who 
has  seen  the  tremendous  overstocking  of  goods  among  the  merchants 
in  the  smaller  towns  can  understand  what  a  dead  weight  rests  on'  the 
back  of  the  majority  of  retailers,  and  yet  they  almost  invariably  believe 
that  they  are  saving  money  by  buying  in  large  orders.     Only  rarely 


34(>  PROBLEMS  IN  BUSINESS  FINANCE 

It  is  usually  recognized  that  gross  profit  added  to  the 
cost  of  nierchaiulise  should  be  large  enough  to  cover  all 
overhead  expense  incident  to  the  business  and  should 
include  a  fair  net  profit.  It  is  also  recognized  that  the 
expenses  nuist  bo  kept  below  gross  profit  in  order  to 
show  a  net  profit.  It  is  admitted,  however,  that  there 
are  many  retailers  who  fail  to  appreciate  the  effect  of 
turnover  on  the  net  return;  and  because  of  this  fact 
net  profits  are  often  dissipated  by  slow-moving  assets. 

Assuming  sales  of  $120,000  per  year,  also  an  average 
investment  of  six  months'  sales  in  merchandise  and 
accounts  receivable,  and  a  net  profit  of  $6,000,  the  net 
return  on  the  investment  in  comparison  with  an  invest- 
ment of  -four  and  two  months '  sales  in  these  two  assets 
works  out  as  follows: 

Investment  Investment  Investment 

6  mos.  sales  4  mos.  sales  2  mos.  sales 

Merchandise $30,000  $20,000  $20,000 

Accounts  receivable. .    30,000  20,000                 ^0 

$60,000  $40,000  $20,000 

Turnovers 2  3  6 

Net  profits  on  sales.  .  5%  5%  5% 

Net  return 10%  15%  30%, 

It  will  be  noticed  that  by  lowering  the  investment, 
or  working  capital,  the  turnover  increases  and  the  net 

has  one  of  these  merchants  been  heard  to  admit  that  he  was  overstocked, 
and  even  then,  nothing  more  than  a  guess  could  be  made  as  to  what  Hues 
were  in  excess.  This  hick  of  knowledge  of  the  existence  of  overstocking, 
makes  education  especially  useful,  ancl,  where  it  has  been  given,  flatter- 
ingly productive. 

"That  the  merchant  in  most  cases  loses  money  by  this  method  of 
purchasing  can  be  shown  by  an  illustration.  Suppose  a  merchant  every 
month  buys  an  article  that  costs  him  75  cents  a  dozen  and  sells  a  dozen 
every  month  at  the  price  of  $1.  At  the  end  of  the  year  this  merchant 
has  turned  this  75  cents  twelve  times,  making  25  cents  every  time,  or, 
in  other  words,  has  made  $3  on  an  investment  of  75  cents. 

"Then  a  specialty  salesman  comes  along  and  says,  'You  are  paying 
too  much  money  for  those  goods.  I  can  sell  you  that  same  article  at 
$6  a  gross.' 

"It  looks  like  a  saving  so  the  merchant  takes  a  gross.  During  the 
year  following  this  purchase  he  sells  a  dozen  a  month  or  the  entire  gross, 
at  a  profit  of  $6.  In  other  words,  he  has  made  $6  on  a  $6  investment, 
or  100  per  cent,  while  under  the  former  method  of  buying  he  made  S3 
on  a  75  cent  investment  or  400  per  cent." — Administration,  April,  1921. 
page  450. 


SALES  POLICIES  347 

return  increases  in  the  same  ratio.  Likewise  raising 
the  investment  lowers  the  turnover  and  decreases  the 
net  return." 

(Credit  Mohtiilij,  April,  1<,21,  p.  4(>.) 

Questio7is 

1.  What  is  the  relation  of  "turnover"- to  expense? 

2.  Is  the  "turnover"  of  merchandise  a  more  signif- 
icant factor  in  net  return  than  "turnover"  of  receiv- 
ables?    Why? 

3.  How,  if  at  all,  can  the  "turnover"  of  receivables 
be  increased  without  changing  the  terms  of  sale? 

4.  Does  the  above  example  clearly  indicate  the 
effect  which  an  increased  "turnover"  has  on  business 
profits? 

5.  What  is  to  be  said  for  or  against  the  elimination 
of  the  investment  in  receivables — 

(a)  In  the  case  of  retail  businesses? 

(b)  In  the  case  of  wholesale  businesses? 

(c)  In  the  case  of  manufacturing  concerns? 

6.  If  the  investment  in  receivables  were  greatly 
reduced  or  eliminated,  how  might  it  affect  the  "turn- 
over" of  inventory? 


Prcblem  171 
Can  the  Dealer  Prp:vent  "Bargain  Sales''.^ 

"What  happens  to  your  merchandise  when  the  market 
goes  down?  Your  retailers  put  on  bargain  sales  and 
take  sacrifices  which  they  want  you  to  pay  for  the  next 
time  they  buy  your  merchandise.  Why  not  find  some 
way  to  give  the  retailer  twelve  turnovers  a  year 
instead  of  two?  Every  clearance  sale  in  which  your 
merchandise  is  represented  is  a  disgrace  to  your  busi- 


348  PROBLEMS  IN  BUSINESS  FINANCE 

ness  management,  to  say  nothing  about  being  a  direct 
liability  for  which,  some  time,  you  must  answer." 

Question 
1.  Do    you    agree    with    the    point    of    view    here 
expressed? 


Problem  17*2 

Tin-:  Financial  Significance  of  the  Sales  Policy — 

Selling  to  One  Large  Customer 

The  Blank  Brothers  were  skilful  mechanics  who 
developed  their  little  repair  shop  into  a  small  factory 
for  the  making  of  metal  lamps.  As  their  work  was 
conducted  on  a  very  small  scale,  it  was  not  possible 
for  them  to  reduce  their  costs  enough  to  enable  them 
to  sell  these  lamps  at  a  particularly  attractive  price. 
However,  because  of  the  excellent  quality  of  their  work, 
they  managed  to  build  up  a  very  satisfactory  little 
business,  financing  themselves  solely  out  of  earnings. 
Yet  the  brothers  realized  that  they  could  never  hope 
for  much  volume  of  business  until  they  could  reduce 
their  prices.  Since  they  were  not  skilled  in  "finance," 
they  did  not  feel  that  the}'  could  run  the  risk  of  reducing 
prices  until  they  were  assured  of  a  larger  patronage. 

When  the  business  had  been  developed  to  this 
extent,  the  owners  found  that  a  large  mail  order  house 
was  handling  in  large  quantities  a  lamp  similar  to  the 
one  which  they  made,  and  decided  that  it  would  be 
worth  their  while  to  try  to  supply  this  house.  Accord- 
ingly, they  calculated  their  costs  at  w^hat  they  thought 
to  be  the  lowest  possible  figure  for  producing  the 
probable  number  of  lamps,  added  a  reasonable  margin 
for  profit,  and  made  know^n  their  terms  to  the  mail 
order  house. 


SALES  POLICIES  349 

The  purchasing  agent  of  this  house,  a  very  shrewd 
man,  called  in  a  metal  expert  to  advise  him  whether 
such  a  lamp  as  they  offered  him  should  cost  as  much  as 
they  had  estimated.  He  stated  that  with  the  most 
approved  method  of  producing  the  lamps  the  cost  to 
the  manufacturer  should  be  considerably  lower. 

The  purchasing  agent,  accordingly,  offered  to  buy  a 
large  number  of  these  lamps  from  the  brothers  at  a  price 
based  on  this  lower  cost  of  production.  The  quantity 
called  for  was  so  great  that  it  would  entail  the  building 
of  a  new  plant  and  the  employing  of  many  workers. 
Though  the  brothers  felt  that  their  profits  might  be 
almost  wiped  out  if  they  accepted  the  figure  offered  by 
the  mail  order  house,  yet  the  bigness  of  the  proposition 
appealed  to  them  and  they  decided  that  it  would  be  to 
their  advantage  to  make  the  venture.  In  accordance 
with  this  decision  they  contracted  to  give  all  of  their 
greatly  increased  output  to  the  mail  order  house  for  a 
fixed  period  of  time,  at  the  end  of  which  a  new  contract 
might  be  made  or  relations  might  be  severed. 

Having  launched  on  this  new  program,  the  broth- 
ers'found  that  their  costs  could  be  reduced  much 
lower  than  they  had  originally  anticipated,  so  that  they 
actually  made  a  good  deal  of  money  on  the  contract. 
When  the  period  of  the  contract  expired,  the  mail 
order  house  refused  to  make  a  renewal  except  on  terms 
which  the  manufacturers  felt  would  be  suicidal.  The 
brothers,  therefore,  found  themselves  with  a  large  in- 
vestment in  plant  and  a  considerable  force  of  workers 
employed,  apparently  confronted  b}'  two  alternatives— 
either  they  might  continue  to  produce  in  volume  at 
what  they  deemed  to  be  a  sure  loss,  or  they  might  close 
down  most  of  their  plant  and  operate  on  a  smaller 
scale,  which  would  probably  not  even  yield  them 
enough  return  to  pay  a  reasonable  interest  on  their 
investment. 

Questions 

1.  Under  what  circumstances,  if  any,  would  you 
expect  it  to  be  to  the  advantage  of  a  producer  to  sell 
his  output  to  only  one  purchaser? 


3oU  PROBLEMS  IN  Bl  SINEiSS  FINANCE 

2.  Do  you  think  that  this  concern  followed  the 
right  policy  in  refusing  to  renew  its  contract  with  the 
mail  order  house? 

3.  If  you  were  advising  these  brothers  as  to  the 
"next  step,"  what  would  you  tell  them? 

4.  If  the  expansion  of  plant  had  been  secured  largely 
by  means  of  a  mortgage,  would  you  give  the  same 
advice  as  if  the  plant  had  been  paid  for  out  of  earnings? 


E.     PRICE  POLICIES 

Problem   17.S 
Relation  Between  a  Fixed  Sales  Price  and 
The  Financial  Pro(;raim 

There  are  many  manufacturing  concerns  which 
produce  a  well-known,  standard  article  which  was  sold 
by  the  retailer  before  the  war  at  a  fixed  price,  allowing 
a  fair  profit  both  to  producer  and  retailer.  In  the  case 
of  these  commodities  the  brand  and  the  price  became 
inseparably  connected  in  the  minds  of  the  buying 
public.  Examples  of  this  sort  are  furnished  by  the 
Ingersoll  dollar  watch,  Uneeda  Biscuits  at  5  cents  a 
package,  Ivor}-  Soap  at  5  cents  a  cake,  Campbell's 
Soups  at  10  cents  a  can,  and  other  cases  too  numerous 
to  mention. 

This  selling  price,  while  not  necessarily  maintained 
by  all  distributors,  was  understood  and  expected  by 
the  buying  public.  Furthermore,  the  prices  had  been 
arrived  at  during  a  period  of  slowly  rising  prices  when 
the  increase  in  the  cost  of  production  was  probably 
largely,  if  not  wholly,  offset  by  the  increase  in  efficiency 
of  production.  "  -  . 


PRICE  POLICIES  351 

When  the  cost  of  material  mounted  with  unprec- 
edented rapidity  during  the  war  period,  such  concerns 
were  confronted  by  an  extremely  difficult  financial 
problem.  If  they  should  attempt  to  raise  their  stand- 
ard prices  in  order  to  cover  their  increased  costs  they 
must  immediately  reckon  with  the  public  opposition, 
which  would  result  from  the  advertising  policy  that 
had  been  followed  and  from  the  association  in  the 
minds  of  buyers  of  a  stated  price  with  the  brand  in 
question.  It  was  sometimes  a  problem  to  know 
whether  an  increase  in  prices  would  cut  down  sales  and 
give  a  competitor  an  opportunity  to  establish  himself. 
Further,  if  quantity  or  quality  should  be  altered,  with 
a  maintenance  of  the  old  price  scale,  there  would 
almost  certainly  be  a  loss  of  goodwill  which  it  had  taken 
years  to  build  up.  Yet,  unless  some  definite  steps  had 
been  taken,  many  of  these  concerns  would  have  become 
financially  embarrassed. 

Questions 

1.  What  suggestions  can  you  ofTer  as  to  the  best 
method  of  solving  the  problem  above  presented? 

2.  Will  your  answer  apply  to  all  types  of  products? 

3.  How,  if  at  all,  does  the  position  differ  of  those 
concerns  which  sell  a  product  at  a  standard  price 
and  which  have  many  competitors  in  the  field  selling  a 
similar  product  at  the  same  price  —  for  example, 
makers  of  men's  collars  retailing  at  two  for  a  quarter, 
and  makers  of  cotton  thread  selling  ordinarily  at  5  cents 
per  spool? 

4.  As  a  general  proposition,  do  you  consider  it 
financially  desirable  to  stress  the  selling  price  in  ad- 
vertising brands  of  the  sort  above  indicated? 


352         PROBLEMS  IN  BUSINESS  FINANCE 

ProblkiM   m 
Price  Guarantees 

The  E.  Wholesale  Hardware  Company  had  a  large 
inventory  on  its  hands.  Its  customers  were  afraid 
to  buy  because  of  business  uncertainties,  yet  unless 
the  inventory  was  turned  over  the  company  could 
not  pay  its  maturing  bills. 

To  meet  the  situation  the  E.  Company  decided  to 
offer  its  goods  at  such  a  price  as  would  insure  a  very 
low  profit,  and  to  give  its  customers  a  guarantee 
against  loss  resulting  from  a  drop  in  the  price  of  goods 
within  a  specified  time,  the  period  of  guarantee  being 
that  normally  required  for  the  turnover  of  this  partic- 
ular type  of  inventory  in  the  best  managed  stores 
among  the  E.  Company's  customers. 

Questions 

1.  What  should  you  expect  the  financial  effects  of 
this  policy  to  be,  (a)  immediately,  (b)  ultimately 

(.r)  On  the  selling  house? 
(y)  On  the  customers? 

2.  If  this  policy  had  been  generally  followed,  what 
effect  would  it  have  had  on  recent  business  conditions? 

3.  If  such  a  policy  were  followed  by  only  one  repre- 
sentative concern  in  a  particular  industry,  what  should 
you  expect  the  financial  outcome  to  be? 

(Reference:     System,  July,  1921,  p.   41  ff.) 


PR()BLf:M    17.> 

InCREASINC    the   TlRNOVER    AND    DECREASING    (\\KCELA- 

TioNs  BY  Reducinc;  Prices  Even  on  Gocds 
Already  Sold 

A    Philadelphia   manufacturer    of   shirts    writer   as 
follows   regarding    the  development  of  their  business 


PRICE  POLICIES  353 

and  their  relations  with   their  customers  during  the 
period  of  depression : 

Eleven  years  tiji^o  wlieii  our  eomi  any  decided  upon  a 
campaign  of  national  adveitihing,  we  made  it  a  fundamental 
policy  to  maintain  contiiuious,  uninteiru),ted  jnoduction 
based  on  average  y(>aily  conditions  in  this  coin:trv  rather 
than  to  fluctuate  pi'oduction  to  meet  tenipoiiuy  cui'i'cnt 
demands.     The  result  has  been  a  steady,  continuous  growth. 

Twice  during  the  past  five  yeais  we  have  l)een  put  to  the 
ciiicial  test  of  standing  staunchly  by  that  policy,  come  what 
may,  or  of  abandon  ng  it  completely  and  shaping  a  new. 

The  firsl  test  came  during  the  wai',  when  business  all  over 
the  nation  was  exj^anding  ai.d  the  geneial  teii')  tation  was  to 
reach  out  and  grab  foi-  all  that  might  be  had.  The  second 
came  at  the  outs(>t  of  the  I'ccent  depi'ession  when  the  temp- 
tation was  revei'sed  and  the  impelHng  inclination — the  easy 
way— was  to  shut  (.lown  the  plant,  halt  pioduction  and  wait 
for  the  turning  of  the  tide. 

By  refusing  to  yield  to  the  common  impulse  on  the  first 
occasion,  though  it  cost  us  a  very  consitlerable  loss  of  more 
than  20  pei"  cent  in  orders  at  the  time,  we  were  largely  en- 
abled to  successfully  jiass  through  the  second.  During  the 
entire  period  of  didl  business,  as  a  result,  our  cancelations 
have  not  amount(>(l  to  more  than  10  per  cent;  our  factory 
has  been  running  at  full  time;  thej-e  have  been  no  reductions 
in  horns  oi'  working  forces  othei'  than  those  of  a  normal 
nature,  and  the  volinne  of  our  business  stood  at  within  10 
per  cent  of  our  record  normal  of  the  past  few  yeais. 

:i:  :!:  *  *  *  * 

During  the  boom  da>'s  of  the  war  and  the  innnediate  post- 
war period  we  stopjXMl  going  after  new  business,  which  was 
available  on  all  sides  and  allotted  our  pioduct  to  our  estab- 
lished accounts. 

We  did  not  expand.  l)uild  new  i)lants,  and  disregard  our 
standard  of  quality  to  secure  incieased  pioduction.  We 
centered  oui'  efforts  almost  exclusively  on  imf)roving  the 
facilities  we  already  had  and  so  were  al)le  to  appreciably 
increase  pioduction  with  the  same  working  force,  and  keep 
our  labor  turnover  at  less  than  o  per  cent. 

Then,  when  the  tide  began  to  go  out  ai  d  the  business 
skies  grew  black,  we  had  icason  to  congratulate  ourselves 
on  having  laid  down  a  princii)le  ;uid  having  liad  the  courage 
to  stick  to  it.  Our  organization  was  sound;  our  final. ces 
were  in  excellent  shajx*;  we  were  i)re]iared  to  cope  with 
emergencies,  to  stand  the  racket  when  it  caire. 

While  oui-  prospects,  when  the  slump  struck  us,  were  no 
brighter  than  those  of  others,  behind  us  we  had  a  gooilwill 


354  PROBLEMS  IN  BUSINESS  FINANCE 

and  public  (1:muuk1  born  of  10  years  of  coiisuiuei-  adveitising. 
In  the  spring  of  1923  o  n-  salesmen  went  out  and  booked  the 
greatest  volume  of  fall  business  in  our  history.  As  a  matter 
of  fact  it  exceeded  the  allot ;Ti?nts  we  had  given  the.n  by 
more  than  10  per  cent.  Then,  in  the  fall,  depression  started 
to  sweep  the  country;  cancelations  started  to  come  in; 
factories  about  us  and  in  the  same  line  weie  closing  down  or 
going  on  shoit  time;  no  new  bus  ness  was  in  sight. 

At  the  first  indication  of  this  we  moved  to  foiestall  can- 
celations of  orders  as  far  as  po.ssilile.  Realizing  that  the 
retailer's  price  on  our  product  would  be  governed  laigely 
by  what  he  had  paid  us,  it  seemed  desirable,  if  our  goods  were 
to  sell  to  the  public,  that  price  reductions  be  made  not  only 
on  goods  awaiting  shipment  from  the  factory,  but  also  on 
goods  .shipped  earlier  and  on  the  retailer's  shelves.  Con- 
.sequently  on  Septembei-  1  we  notified  our  retailei-s  by  mail 
to  this  effect. 

****** 

This  action,  together  with  the  fact  that  we  had  under- 
sold the  demands  of  our  fall  market,  had  the  desired  effect. 
Cancelations  innnediately  slowed  up  and  in  total  were  only 
sufficiently  large  to  balance  eveidy  against  the  10  per  cent 
excess  in  orders  the  .salesmen  had  turned  in  ovei-  theii'  allot- 
ment. Our  volume  of  business  foi'  the  fall  season  was  the 
largest  in  oui-  40  years'  existence,  and  our  woiking  force  aid 
our  plant  were  practically  at  normal  in  every  respect  except- 
ing wages. 

(System,  May  1021,  p.  (^r^:i,  ff.) 

Questions 

1.  Do  you  think  this  liberal  price  reduction  policy 
would  have  had  the  desired  effect  in  all  lines  of  business? 

2.  Do  you  see  any  essential  connection  between 
the  expansion  policy  followed  by  this  company  and 
the  outcome  of  their  price  policy  as  reported? 

3.  Do  you  see  any  connection  between  the  success 
of  this  policy  and  the  character  of  the  company's  cus- 
tomers or  the  nature  of  the  terms  made  with  them? 


PRICE  POLICIES  355 

Problem  176 

P^FFEOT  OF  Price  Reductions 

Q^iestions 

1.  Should  a  manufacturing  concern  which  makes 
goods  having  a  largely  seasonal  sale,  cut  the  price  on 
its  product  immediatel}-  after  the  majority  of  its 
customers  have  been  supplied? 

2.  What  would  be  the  financial  effect  of  such  a  policy, 
(rt)  immediately,  (5)  in  the  long  run,  on 

(x)  The  selling  concern? 
(//)   Its  customers? 


Problem   177 

Relation  Between  Price  Policy  and  General 
Financial  Policy  During  a  Period  of  Depression 

The  D.  F.  Company,  a  firm  manufacturing  ladies' 
suits,  followed  the  usual  policy  of  those  in  the  trade 
during  the  year  1919  and  the  first  part  of  1920.  They 
looked  for  continued  increase  in  p.ices,  and  urged 
their  customers  to  buy  at  once  in  order  to  benefit  by 
the  present  "bargains"  and  to  assure  themselves  of 
good  quality.  The  retailers  and  the  few  jobbing 
houses  to  whom  they  sold  were  still  in  a  buying  mood 
in  the  first  part  of  1920,  and  ordered  their  goods  far 
ahead.  As  a  consequence,  the  compaity  stocked  up 
heavily  with  inventory  at  the  highest  prices  so  as  to 
be  in  a  position  to  deliver  goods  for  the  following  win- 
ter trade. 

While  a  large  ciuantity  of  their  material  was  still 
unmade  or  "in  process,"  there  began  to  be  rumors 
of  a  break  in  the  prices  of  woolen  goods.  The  "buyers' 
strike"   began  to  be  serious,   and  orders  were  being 


8r)(>  PROBLEMS  IX   BUSINESS  FINANCE 

canceled,  or  even  I'efused  alter  shipments  had  been 
made.  Hence  the  D.  F.  Company,  though  it  had 
made  a  great  deal  of  money  during  the  war  and  had 
been  successfully  financed  in  earlier  years,  found 
itself   in    a   decidedly    embarrassing   position. 

It  had  borrowed  to  the  limit  from  its  banks  in  order 
to  buy  materials  which  it  expected  to  sell  in  finished  form 
at  a  large  profit,  and  now  its  inventories  were  rapidly 
shrinking  in  value.  On  account  of  cancelations  "re- 
ceivables" were  changing  back  into  "merchandise." 
Further,  those  customers  who  had  ordinarily  taken 
their  cash  discounts  began  to  be  slow.  Hence  "ac- 
counts receivable"  on  the  company's  books  became 
practically  frozen  as  the  distributors  of  their  goods 
were  feeling  the  effects  of  the  "buyers'  strike."  By 
September,  1920,  their  financial  position  was  approxi- 
mately as  follows: 

Statement  of  the  I).   F.  Company 
September,    1920 

Assets 

Maehinerv,  e(iuipnieiit,  etc $100,000 

Cash 5,000 

Accounts  receivable 200,000 

Notes  receivable 25,000 

Inventory: 

Unmade  and  in  process 300,000 

Finished  goods 300,000 

$930,000 

Liabilities 

Partners'  capital  (original  investment) $100,000 

Notes  payable  (mostly  bank  loans) 400,000 

Accounts  payable 125,000 

Sundrv  payables  and  accruals 25,000 

Surplus 280,000 

$930,000 

At  this  stage  the  company  was  seriously  in  need  of 
more  money  to  pay  its  current  bills  as  well  as  to  satisf}' 
some  of  its  mercantile  creditors.  Their  bank,  how- 
ever, was  so  heavily  involved  that  it  could  not  be 
induced    to   lend   further   credit.     Hence   the   owners 


PRICE  POLICIES  857 

of  the  company  felt  that  the  alternatives  confronting 
them  were,  (1)  a  receivership  forced  by  the  creditors, 
(2)  later  involuntary  bankruptcy,  or  (3)  raising  of 
additional  working  capital  from  some  new  source. 

The  company  finally  decided  to  do  everything  in  its 
power  to  avoid  a  receivership.  Since  all  the  personal 
resources  of  the  members  of  the  firm  were  already 
invested  in  the  business,  they  could  not  secure  any 
additional  capital  on  their  individual  credit.  As 
their  sales  had  not  yet  wholly  ceased,  they  decided 
that  their  best  course  was  to  sacrifice  their  inventory 
at  any  price  which  they  could  obtain,  before  conditions 
became  worse.  They  accordingly  made  a  consider- 
able cut  in  their  prices,  with  the  unexpected  result 
that  sales  instead  of  increasing,  decreased,  and  more 
orders  were  canceled.  Everyone  seemed  to  be  waiting 
for  prices  to  go  still  lower. 

Questions 

1.  What  other  alternatives,  if  any,  could  you  have 
suggested   to  the  management? 

2.  Do  you  see  any  method  whereb}'  the  company 
can  now  avoid  ultimate  bankruptcy? 

3.  Would  the  financial  condition  of  this  concern 
have  been  better  if  it  had  been  incorporated?  Why 
do  you  suppose  it  grew  to  this  size  without  being 
incorporated? 

4.  What  specific  lessons  tioes  the  above  problem 
teach  regarding, 

(a)   The  proper  price  policy  at  various  times? 
(6)  The  sound  principles  of  finance? 


358         PROBLEMS  IN  BUSINESS  FINANCE 

Phoblem  178 

The  Relation  Between  Cost  of  Phodictiox 

And  Market  Price 

A  small  factory  making  a  well-known  product  was 
started  in  one  of  the  Southern  cities  some  years  ago. 
The  owners  were  skilful  workmen  who  themselves 
performed  the  more  important  operations  in  connec- 
tion with  the  manufacture  of  their  product.  They 
had  no  very  definite  idea  of  costs,  but  thought  that 
they  could  readily  undersell  a  larger  concern  making 
the  same  lines  of  goods  in  the  same  place.  Accordingly, 
they  began  on  a  small  scale  by  sending  out  one  sales- 
man who  offered  to  deliver  the  article  at  a  price  from 
20  per  cent  to  30  per  cent  under  the  market  price  then 
prevailing. 

The  larger  company  making  the  same  line  of  goods 
heard  of  the  lower  prices  offered  b}-  the  salesman  of 
this  concern,  and  in  order  to  hold  its  customers,  re- 
duced its  price,  though  the  reduction  would  almost 
wipe  out  all  profits. 

Soon  this  cut  was  reported  to  another  concern  in 
an  adjoining  city,  and  the  second  concern  likewise 
cut  its  prices  to  meet  the  competition.  Thus  the 
movement  continued,  the  prices  for  this  particular 
product  being  generally  cut,  and  no  one  seeming 
to  know  where  the  cut  started. 

In  about  a  year  the  little  factory  which  originally 
made  the  low  price  failed.  In  the  bankruptcy  pro- 
ceedings following,  it  was  found  that  slightly  more 
than  $20,000  worth  of  goods  had  been  sold  by  this 
concern,  while  the  "competing"  and  larger  concerns 
had  sold  more  than  $1,000,000  worth  of  goods  at  the 
reduced  price. 

Qiiestions 

1.  What  particular  significance  can  be  attached  to 
this  incident? 

2.  What  seem  to  you  to  be  the  best  means  of  pre- 
venting the  development  of  a  situation  like  this? 


DISCOUNTS  359 

F.     DISCOUNTS 
Pkohlkm   179 

QlANTITV    DlSCOlNTS 

One  of  the  advantages  which  large  retailers  have 
had  in  the  past  over  small  retailers  has  come  from  the 
quantity  discounts  which  have  been  extended  by  some 
sellers.  Recently,  with  the  increased  cost  of  doing 
business,  there  has  been  a  tendency  toward  the  forma- 
tion of  associations  of  small  retailers  for  cooperation 
in  buying.  For  example,  the  retail  druggists  in  Toronto 
have  worked  out  a  scheme  in  accordance  with  which 
each  druggist  is  assigned  the  task  of  buying  enough  of 
certain  goods  to  supply  all  the  druggists  participating 
in  the  plan.  He  then  turns  over  the  goods  to  the 
others  at  the  cost  price.  Each  druggist,  in  reality, 
becomes  a  jobber  along  certain  limited  lines. 

Commenting  on  this  tendency,  a  business  man 
recently  wrote  as  follows: 

Nevertheless  the  cooperative  l)uyitig  a»!;itatioii  is  some- 
thing- that  has  to  be  met  in  a  constructive  way.  It  can't  be 
soft  pedaled  out  of  existence.  The  main  thing,  it  seems  to 
us,  is  to  eliminate  the  dealers'  fear  of  the  l)ig  chains  through 
showing  them  that  the  independent  retailei'  who  will  adhere 
to  certain  primary  laws  of  good  storekeeping,  merchandising 
and  advertising  can  always  have  a  prominent  place  regaid- 
less  of  what  the  chain  may  do.  Time  was  when  the  retailer 
thought  the  retail  mail-order  house  was  going  to  push  him 
out  of  business.  He  loudly  called  to  the  jobbei-  and  manu- 
facturer for  prices  that  would  enable  him  to  com])ete  with 
the  catalogue  houses.  He  has  learned  now  that  mail-oiiler 
business  can  be  kept  in  its  place.  The  chain  store  is  a 
harder  nut  to  crack.  But  it  is  up  to  the  manufacturer  to 
show  the  retailer  that  buying  in  (luantity  prices  will  by  no 
means  solve  the  question  so  far  as  the  retailer  is  conceriied. 

And  what  is  still  more  important,  is  that  manufacturers 
should  determine,  once  and  for  all,  the  justice  or  injustice, 
as  the  case  may  be.  of  the  quantity  discount  system.  As 
long  as  the  quantity  purciiased  determines  the  discount  that 
is  to  be  given,  the  chains  are  always  going  to  have  a  certain 
buy.ng  advantage  over  the  independents.  This  will  in- 
evital)lv  cause  retailers  to  band  themselves  together  for  the 


361)  PROBLEMS  IN  BUSINESS  FINANCE 

purposp  of  {f.'ttinji  d'scounts  that  arc  ('(lua'.ly  as  large  as  those 
g  vcn  the  chains." 

(Printer's  Ink,  Vi'h.  21,  1921,  p.  o'2.) 

Questions 

1.  Is  the  practice  of  granting  quantity  discounts 
financially  desirable  from  the  point  of  view  of  the  sell- 
ing house? 

2.  vShould  the  seller  who  grants  quantity  discounts, 
approve  of  cooperative  purchasing? 

3.  How  may  "quantity"  buying  affect  financially — 

(a)  The  seller? 
(h)  The  buyer? 
(c)   The  ultimate  consumer? 


Problem   180 
Relation  of  Trade  Discou^jts  to  Quantity  Discounts 

"The  Dennison  Manufacturing  Company  is  a  well- 
established  business  with  its  headquarters  and  plant 
located  in  New  England.  Branch  sales  offices  are 
maintained  in  about  thirty  of  the  large  cities  of  this 
country,  Canada,  South  America,  England  and  Den- 
mark. In  addition  retail  stores  are  maintained  in 
four  of  the  larger  cities  of  the  United  States.  These 
retail  stores  are  established  primarily  for  promotional 
purposes  and  do  not  compete  to  any  substantial  degree 
with  the  retailers  carrying  the  company's  products. 

The  company  manufactures  a  \'aried  list  of  paper 
products,  such  as  shipping  tags,  marking  tags,  gummed 
labels,  crepe  paper  products,  jewellers'  cases,  boxes, 
and  findings.  Although  the  company  sells  a  large 
quantity  of  special  goods  direct  to  consumers,  this 
problem  is  concerned  with  their  regular  stock  goods. 
In  these  regular  stock  goods  there  are  approximately 


DISCOUNTS  361 

8,000  items.  Most  of  these  items  are  used  by  the 
ultimate  consumer  in  small  quantities,  and  the  unit 
value  is  small.  Consequently  they  are  distributed 
largel}''  through  retailers. 

These  stock  lines  are  catalogued  and  priced  by  the 
unit  and  in  many  cases  also  by  the  carton,  containing 
six,  ten,  twelve,  or  more  units.  The  retail  price  given 
in  the  company's  catalogue  is  quite  generally  observed 
by  the  retail  trade,  except  in  the  Far  West,  where  high 
freight  rates  make  it  necessary  to  charge  a  higher 
retail  price.  The  intention  of  the  company  is  that 
the  consumer  who  buys  from  the  retail  merchant 
shall  pay  the  price  which  is  stated  in  the  catalogue. 
WTien  the  goods  are  boxed  in  cartons  containing  more 
than  one  unit,  the  price  stated  for  the  carton  is  called 
the  Hst  price,  and  the  consumer  purchasing  a  whole 
carton  would  be  given  this  Ust  price  by  the  dealer. 
When  goods  are  sold  in  less  than  carton  lots,  the  unit 
price  is  slightly  higher  than  the  price  per  unit  in  carton 
lots.  From  the  retail  price  or  from  the  carton  or  list 
price,  when  that  exists,  the  discounts  to  the  trade  are 
figured. 

The  wholesale  stationer  who  can  handle  practically 
everything  that  the  company  makes,  receives  a  dis- 
count of  40  per  cent  from  the  list  price,  provided  he 
sells  not  less  than  $200  worth  of  merchandise  in  a 
calendar  year.  Under  certain  conditions  he  maj^  also 
receive  in  addition  certain  quantity  discounts.  The 
minimum  of  $200  is  a  nominal  amount  and  is  established 
merely  as  a  guarantee  of  good  faith  on  the  part  of  the 
wholesaler. 

A  large  portion  of  the  company's  sales  of  stock 
goods  are  made  direct  to  retailers  through  the  com- 
pany's travelling  salesmen.  A  substantial  number 
of  these  retailers  also  carry  on  a  wholesale  business, 
wholesaling  to  smaller  retailers. 

A  retailer  who  sells  $500  worth  or  more  of  the  com- 
pany's products  a  year  receives  a  discount  of  40  per 
cent  the  same  as  the  wholesaler.  To  those  retailers 
selling  less  than  $500  a  year,  a  discount  of  30  per  cent 


362  PROBLEMS  IN  BUSINESS  FINANCE 

from  the  list  price  is  given.  Under  certain  circum- 
stances, the  retailer,  just  as  the  wholesaler,  may  receive 
quantity  discounts,  regardless  of  the  annual  purchases. 
Two-thirds  of  the  sales  of  stock  goods  are  made  to 
retailers  who  receive  the  40  per  cent  discount.  Out  of 
10,000  dealers  who  carry  the  Dennison  goods,  some- 
thing over  2,000  are  in  the  40  per  cent  class,  and  their 
purchases  average  about  $1,500  a  year. 

The  company's  salesmen  call  on  dealers  in  towns 
of  25,000  population  and  up.  Small  purchases  by 
dealers  in  these  towns,  however,  are  usually  made  from 
wholesalers  because  of  the  saving  in  freight.  All  the 
goods  are  shipped  from  the  company's  factory  and 
the  buyer  pays  the  freight. 

Numerous  objections  have  been  raised  to  this  dis- 
count plan.  In  the  first  place,  it  has  been  suggested 
that  there  is  an  element  of  unfairness  in  having  the 
amount  of  the  dealer's  profit  depend  on  the  quantity 
of  goods  which  he  sells  for  the  company.  Neverthe- 
less, the  requirement  of  $200  a  year  for  the  wholesaler 
and  $500  for  the  retailer  is  well  within  the  reach  of 
those  of  the  trade  who  take  sufficient  interest  to  give 
the  line  adequate  display  and  promotive  attention. 

Again,  while  it  is  the  company's  intention  im- 
mediately to  advance  the  discount  when  a  wholesaler 
or  retailer  reaches  the  minimum  requirement,  it  is 
often  difficult  with  10,000  accounts  to  put  the  increased 
discount  into  effect  as  soon  as  the  merchant  is  entitled 
to  it.  If  the  company  fails  to  make  this  change  at 
once,  its  oversight  is  resented  by  the  merchant. 

There  are  also  frequent  occasions  when  a  merchant 
reaches  $500  in  sales  one  year  only  to  fall  below  that 
amount  the  next  year,  thereby  reducing  his  discount 
in  the  third  year.  After  a  dealer  is  once  placed  in 
the  $500  class,  he  remains  there  until  for  one  calendar 
year  he  has  fallen  below  that  limit.  Reductions  in 
the  discount,  however,  are  fairly  frequent  owing  to 
the  fluctuations  in  a  merchant's  business  and  also 
because  a  merchant  may  go  over  the  minimum  in 
one  year,  due  to  an  unusually  large  order  for  Dennison 


DISCOUNTS  363 

goods  that  he  may  have  received  from  one  of  his  cus- 
tomers, as,  for  example,  from  some  government  agency 
or  from  a  railroad  company. 

One  object  of  the  high  discount  is  to  reward  the 
merchant  who  takes  an  interest  in  this  line,  and  it  is 
naturally  desirable  from  one  standpoint  to  hold  forth 
the  inducement  of  the  high  discount  as  an  incentive 
to  the  merchant  who  has  not  yet  attained  it.  It  has 
been  found,  however,  that  this  stimulus  is  rather 
dangerous  as  it  may  encourage  a  merchant  just  under 
the  line  to  pad  his  orders  near  the  end  of  the  year  in 
order  to  go  over  the  $500  mark.  Having  padded  his 
orders  in  one  year  he  inevitably  runs  the  risk  of  re- 
quiring less  goods  the  next  year  and  thus  may  fall 
below  the  minimum  amount. 

Friction  is  also  encountered  with  the  merchant  who 
may  have  failed  to  reach  the  minimum  by  only  a  few 
dollars  and  who  claims  that  an  injustice  is  being  done 
to  him  when  he  was  so  near  the  mark.  This  difficulty 
has  been  particularly  pronounced  during  the  period 
of  unusually  heavy  demand  and  the  shortage  of  many 
items.  Under  these  conditions  the  company  has 
frequently  been  unable  to  ship  to  a  merchant  all  the 
goods  he  ordered.  Consequently  the  merchant  has 
claimed  that  if  the  company  had  made  shipments  to 
him  in  accordance  with  his  orders,  he  would  have 
been  well  over  the  $500  line. 

The  company  is  embarrassed  also  w^hen  it  comes  to 
opening  an  account  with  a  new  customer.  He  may 
be  in  prospect  a  promising  40  per  cent  account;  per- 
haps he  already  has  a  large  established  business;  or 
he  may  just  be  starting  a  business  of  his  own  on  an 
unusually  large  scale  because  of  experience  that  he 
has  had  in  some  large  store. 

Such  a  merchant  believes  that  he  is  entitled  to  the 
40  per  cent  discount  because  of  the  future  possibilities 
of  his  business.  In  many  of  these  cases  the  company 
would  prefer  to  give  the  men  as  great  an  inducement 
as  possible  to  put  in  a  full  line  of  goods  if  it  could  be 
done  without  breaking  down  the  established  custom. 


364  PROBLEMS  IN  BUSINESS  FINANCE 

In  the  last  few  years  there  has  been  a  rapid  advance 
in  prices  and  $500  worth  of  merchandise  represents 
much  less  in  bulk  than  it  did  in  1914.  Consequently, 
by  virtue  of  these  high  prices,  many  dealers  are  coming 
into  the  40  per  cent  class.  If  prices  and  the  volume 
of  sales  go  back  to  a  more  normal  level,  some  of  these 
merchants  will  again  drop  into  the  lower  class. 

The  company  is  also  troubled  from  time  to  time 
with  the  pooling  of  orders  whereby  two  or  more  small 
dealers  entitled  only  to  30  per  cent  discount  combine 
in  ordering  their  goods  in  order  to  get  over  the  $500 
mark.  The  company  cannot  stop  this  abuse  provided 
the  combination  of  dealers  has  the  goods  shipped  and 
billed  to  one  address.  The  company  does  decline  to 
grant  the  discount  if  such  dealers  ask  to  have  the  goods 
shipped  or  billed  to  more  than  one  place. 

One  of  the  suggestions  that  has  been  made  for  the 
solution  of  this  problem  is  to  give  the  entire  trade,  both 
wholesalers  and  retailers,  the  discount  of  40  per  cent. 
This  would  be  objected  to  by  the  wholesaler  as  cutting 
off  his  trade  wdth  the  smaller  retailers.  The  whole- 
saler now  sells  to  the  smaller  stores  in  urban  districts 
and  especiall}^  to  the  stores  in  the  rural  districts  and 
small  towns. 

Another  suggestion  has  been  to  eliminate  the  min- 
imum sales  requirement,  to  give  to  retailers  40  per  cent 
off  and  an  extra  10  per  cent  discount  to  wholesalers. 
One  of  the  draw^backs  to  this  plan  is,  that  numerous 
retailers  are  also  wholesalers.  They  would  imme- 
diately claim  the  extra  discount,  and  it  w^ould  not 
be  long  before  other  large  retailers  would  be  demand- 
ing the  same  discount  as  their  competitors.  The 
company  also  fears  that  the  introduction  of  the  extra 
10  per  cent  discount  to  wholesalers  who  are  also  re- 
tailers would  result  in  price  cutting." 

(Quoted  from  Copcland,  Markdiiig  Problems,  336-lMO.) 

Questions 
1.  What    are    the    chief    purposes    of    the    "trade 
discount"? 


DISCOUNTS  365 

2.  What  is  the  relation  of  the  ''trade"  discount  to 
the  ''quantity"  discount? 

3.  What  is   your   opinion   of   the   Dennison   Com- 
pany's pohcy? 

4.  What  steps  would  you  advise  them  to  take? 


Problem  181 
The  Cash  Discount — Theory  vs.  Practice 

"I  cannot  conceive  of  any  argument  that  would 
defend  the  practice  of  taking  (or  stealing)  extra  time 
on  a  cash  discount  or  a  net  maturity.  Since  the  dis- 
count offered  is  much  more  than  the  use  of  the  money 
is  worth,  the  basic  principle  is  offering  a  reward  for 
keeping  a  contract,  and  appealing  to  the  instinct  of 
cupidity,  instead  of  to  the  higher  ideals  of  justice  and 
right. 

"The  offer  of  a  fair  rate  of  interest  for  anticipated 
payment  is  the  only  cash  discount  that  is  correct  in 
principle  and  a  large  discount  is  only  defensible  on 
the  ground  of  expediency. 

"Then  the  question  is  raised,  'Will  not  a  cash  dis- 
count enable  us  to  approach  nearer  to  the  goal  of 
prompt  receipt  of  the  net  amount?'  Emphatically  it 
will  not.  A  discount  foi-  cash  in  ten  days  is  impossible 
of  strict  enforcement,  for  in  but  few  cases  can  a  ship- 
ment be  received  and  the  account  put  through  the 
various  necessary  channels  and  the  remittance  made 
to  reach  the  shipper  in  ten  days.  When  almost  daily 
shipments  are  made,  what  firms  will  discount  each 
separately?  Thej^  'bunch'  the  invoices,  'average' 
the  dates  and  the  average  is  usually  later  than  the  list 


3()0  PROBLEMS  IN  BUSINESS  FINANCE 

invoice.  With  so  few  exceptions  as  to  make  it  dis- 
tinctly the  rule,  the  best  and  largest  firms  construe 
ten  days'  cash  discount  to  be  payment  by  the  tenth 
of  each  month  for  the  previous  month's  shipments. 

"What  I  would  advocate  as  a  basis  for  general  agree- 
ment is,  'Net  cash  30  days,'  for  a  month  is  a  unit 
of  time  in  business." 

Questions 

1.  WTiat  appear  to  you  to  be  the  real  advantages, 
if  any,  of  the  cash  discount? 

2.  Do  you  approve  of  the  opinion  above  expressed? 

(For  specific  information  on  "terms  of  sale"  consult  Ettinger  and 
Golieb.  66-76,  also  articles  in  Federal  Reserve  Bulletin.) 


Problem  IH'i 
The  Cash  Discount  "Piracy" 

"We  would  protest  that  there  is  no  more  justifica- 
tion for  a  merchant  to  take  advantage  of  2  per  cent 
discount,  after  discount  terms  have  been  past,  than 
there  would  be  for  the  seller  to  exact  an  additional  2 
per  cent  on  selling  price  when  payment  is  made." 

Questions 
Do  you  agree?     Why  or  why  not  ? 


DISCOUNTS  367 

Problem  183 
Letters  on  the  Cash  Discount 

Criticize  the  following  letters  regarding  the  "Cash 
Discount  Piracy": 

A.  We  regret,  however,  that  you  are  offended  by  our  in- 
sistence in  this  matter  of  discount,  but  hope  that  upon  further 
consideration  it  may  appear  to  you  in  a  different  light. 

The  effort  of  any  house  to  maintain  its  terms  deserves 
commendation,  not  censure;  in  equity  to  all  who  purchase 
under  them,  it  would  not  be  fair  to  grant  one  account 
special  terms  not  enjoyed  by  all.  In  other  words,  were  the 
circumstances  reversed  you  would  not  want  to  have  1% 
or  2%  discount  more  to  pay  than  another  one  of  our  custom- 
ers under  conditions  which  are  identical. 

We  have  always  endeavored  to  make  no  exceptions, 
play  no  favorites.  Is  it  not  well  to  be  assured  that  you  are 
getting  the  same  value  and  service  that  every  merchant  on 
our  books  enjoys? 

Could  you  afford  to  be  satisfied  with  less?  Join  hands 
with  us  for  a  square  deal  for  all,  all  the  time. 

Won't  3'OU  forget  our  little  misunderstanding? 

B.  We  are  returning  your  check  amounting  to  $ , 

We  dislike,  each  time  your    remittance    is   received,    to 

find  it  necessary  to  complain  about  your  method  of  dis- 
counting, which  you  can  see  is  utterly  contrary  to  our  terms. 
We  have  explained  this  to  you  several  times  and  are  sur- 
prised that  you  do  not  cheerfully  meet  our  requests,  as  it 
surely  is  apparent  to  you  that  you  are  not  justified  in  the 
discount  deductions  you  make. 

Won't  you  kindly  favor  us  witii  your  better  attention 
to  this  matter  and  let  us  have  your  check  for  the  correct 
amount? 

C.  We  regret  that  we  cannot  allow  the  discount  you 
deduct,  however,  and  are  accordingly  returning  your  re- 
mittance, preferring  to  receive  it  a  week  hence  for  the  full 
amount  of  your  account. 

When  3'ou  purchased  this  bill  of  us  you  had  the  privilege 
of  two  terms  of  i)ayment,  i.  e.  you  could  pay  within  ten  days 
and  deduct  2%  cash  discount  as  a  reward  for  prompt  pay- 
ment, or  3'ou  could  remit  the  face  of  the  account  at  the  end 
of  the  net  thirty-day  terms. 

Your  remittance,  just  received,  does  not  contemplate  a 
choice  of  these  two  terms,  but  included  both — you  remit  in 
twenty-two  days  and  take  advantage  of  the  ten-day  dis- 
count terms. 


3()S  PROBLEMS  IX  BUSINESS  FINANCE 

Wo  should  like  to  please  you  in  this  matter  but  feel  that 
we  cannot  consistently  do  so  when  we  take  into  consideration 
our  own  requirements  and  the  necessity'  of  being  scrupulously 
careful  to  treat  all  our  friends  and  customers  alike,  which  we 
would  not  be  doing  were  we  to  create  a  preference  in  the 
present  instance. 

(All  quofod  from  I  awrenco,  Cnsfi  IHscomil  Piraci/.)    ■ 

G.  COLLECTIONS 

Problem  184 
CHARfiiNf;   Interest  ox  Past  Die  AcrorxTs 

A.  "When  we  come  to  analyze  our  books  we  find 
our  customers  divided  into  six  classes,  and  that  terms 
which  are  rigidh'  enforced  on  us  for  payments,  mean 
little  or  nothing  to  a  very  large  percentage  of  our  trade. 
This  is  owing  to  our  country  being  largely  agricultural, 
affording  but  one  general  pay  day,  so  to  speak,  making 
large  lines  of  credit  and  long  time  a  necessity  of  hberal 
trade  in  this  section.  This  condition,  however,  but 
adds  strength  to  our  argument.  Of  the  above-named 
classes  we  give  the  discounter  first  place,  and  this  class 
is  growing,  owing  to  our  fine  local  conditions.  Next 
we  name  the  man  who  pays  when  due  on  regular 
terms,  much  prized,  but  in  our  business  so  small  in 
number  as  to  be  scarcely  recognizable  in  comparison 
with  the  whole.  Thirdly,  the  customer  who  settles 
by  note,  representing  a  most  respectable  number  and 
volume,  and  among  our  most  valued  trade.  The 
next,  and  possibly  the  class  representing  our  greatest 
volume  in  dollars,  are  those  who  pay  on  accounts  as 
they  can  and  make  one  or  two  note  settlements  a  year. 
Among  these  are  many  of  that  peculiar  temperament 
who  will  pay  interest  on  a  note,  but  object  to  the 
charge  on  open  account,  and  we  strike  our  first  snag. 
The  fifth  class,  numerically  larger  than  all  the  others 
combined,  is  composed  of  those  who  make  payments 
from  time  to  time,  require  carrying  generally,  want 
all  there  is  coming  to  them  and  then  some,  give  you 
only  a  portion  of  their  trade,  object  to  note  settlement, 


rOLLECTIONS  369 

and  won't  pay  interest  if  they  can  avoid  it.     And  lastly, 
but  not  soon  forgotten,  those  who  won't  pay  at  all. 

"Returning  to  the  main  issue  between  our  customer 
and  ourselves,  what  is  the  argument?  Briefly  this: 
The  charge  of  interest  is  made  to  reimburse  us  in  part 
for  an  outlay  solely  in  his  behalf,  which  in  all  justice 
can  only  be  covered  by  a  direct  charge  on  his  account, 
at  a  rate  usually  less  than  he  could  obtain  it  from 
his  own  banker,  and  without  one  penny's  worth  of 
security.  Justice  is  so  manifest  in  this  brief  argument, 
that  further  discussion  should  not  be  necessary,  but 
we  have  often  been  met  with  the  reply  from  customers, 
that  they  cannot  or  do  not  charge  interest,  hence  we 
should  not  charge  them." 

B.  ''It  has  been  my  experience  that  to  charge 
interest  every  month  often  has  the  effect  of  stirring 
the  customer  to  an  effort  to  collect  his  accounts,  that 
he  may  pay  his  bills  when  due  and  thus  save  interest, 
and  it  often  happens  that  he  will  pay  us  and  make 
the  one  who  does  not  charge  interest  wait  for  his 
money.  One  might  charge  a  slow  pay  customer  more 
for  his  goods  than  he  does  the  one  who  is  prompt, 
but  that  would  be  a  discrimination  not  justifiable 
and  in  the  end  would  prove  unsatisfactory.  It  some- 
times happens  that  the  slow  customer,  by  industry, 
economy  and  close  attention  to  business,  succeeds 
in  accumulating  capital  sufficient  to  pay  promptly 
or  to  discount,  and  when  that  time  comes  the  jobber  who 
has  held  him  up  and  robbed  him  will  lose  the  business. 

"A  jobber  cannot  in  justice  to  himself  or  his  cus- 
tomer fail  to  charge  interest  from  maturity  of  bills.  If 
one  will  figure  interest  at  6  per  cent  on  an  account  from 
maturity  he  will  be  astonished  to  learn  how  short  a 
time  it  takes  to  eat  up  the  entire  net  profit.  It  is  an 
unfair  proposition  to  furnish  one  man  $500  or  $1,000 
or  more  as  capital  in  his  business  to  compete  with 
equally  good  customers  who  pay  promptly,  unless  the 
current  rate  of  interest  is  charged  and  even  then  there 
is  an  element  of  unfairness  in  it. 


370         PROBLEMS  IN  BUSINESS  FINANCE 

"1  maintain  that  not  to  charge  interest  is  discrim- 
inatory as  between  customers  and  unfair  to  those 
who  pay  promptly.  It  places  a  premium  upon  slow- 
ness. The  customer  on  one  side  of  the  street  who 
pays  his  bills  promptly  undoubtedly  is  at  times  com- 
pelled to  go  to  his  banker  and  borrow  money  to  enable 
him  to  be  prompt.  The  customer  on  the  other  side 
of  the  street  who  compels  the  jobber  to  carry  his  ac- 
count instead  of  going  to  bank  and  borrowing  the 
money,  is  buying  his  goods  cheaper  than  the  prompt - 
pay  customer  just  to  the  extent  of  the  interest  he 
would  have  to  pay,  if  the  jobber  does  not  charge  it, 
and  the  prompt-pay  customer  is  at  a  disadvajitage." 

Questions 

1.  Examine  critically  the  above  reasoning. 

2.  Should  interest  be  charged  on  past  due  accounts? 
How  should  you  answer  this  question — 

(a)  In  the  case  of  a  new  customer? 
{b)  In  the  case  of  an  old  customer? 

(c)  In  the  case  of  a  new  selling  concern? 

(d)  In  the  case  of  an  old  selling  concern? 

3.  Would  your  answers  to  this  question  be  the 
same  for  1917  as  for  the  present  period? 


Problem  185 
Collections  and  the  Bi^siness  Cycle 

A.  "During  a  time  of  falling  prices,  the  best 
reasons  in  the  world  may  be  put  forth  by  debtors  for 
not  paying  their  bills  and  these  reasons  are  so  nearly 
like  those  which  in  normal  times  are  good  reasons  that 
one  has  to  give  not  a  Uttle  thought  to  the  distinguishing 
of  the  good  from  the  bad. 

"For  instance,  under  ordinary  circumstances  it 
is  not  good  business  to  push  a  man  for  money  if  he  has 


COLLECTIONS  371 

not  been  able  to  sell  what  you  have  sold  to  hhn.  We 
have  to  consider  credits  and  collections  in  their  larger 
sense  and  recognize  that  the  creditor  is  interested  in 
preserving  a  customer  and  a  business  unit  as  well  as 
in  getting  his  money.  Hence  pressing  a  solvent  and 
merely  unfortunate  man  is  not  good  business. 

"Today  it  is  not  good  business  to  delay  the  payment 
of  your  own  bills  or  to  allow  debtors  to  delay  in  paying 
you  on  the  plea  that  the  goods  bought  are  still  unsold 
on  the  shelves." 

B.  "The  debtor  who  fails  to  respond  to  admonition 
for  an  overdue  account  and  appears  to  be  slipping, 
should  not  be  held  up  too  hastily.  The  facts  on  which 
the  account  was  opened  should  be  reviewed.  The 
debtor  should  be  treated  as  one  who  but  needs  a  little 
help  to  mend  his  ideas  and  methods  and  produce  the 
desired  results." 

Question 

Can  you  reconcile  the  points  of  view  here  presented? 


Problem  186 
The  Cost  of  Small  Collections 
Questions 

1.  Assuming  that  the  average  cost  of  writing  col- 
lection letters  is  30^^  to  50^^  do  you  think  that  a  busi- 
ness house  should  be  persistent  in  its  attempts  to 
collect  very  small  overdue  accounts? 

2.  Do  you  see  any  method  of  eliminating  the  ex- 
pense in  connection  with  these  small  accounts? 


372         PROBLEMS  IN  BUSINESS  FINANCE 

Problem  187 
Trade  Acceptance  r.s.  Collection  Letters 

"One  way  to  cut  unnecessary  expense — a  way  most 
business  men  might  not  think  of — is  to  avoid  writing 
collection  letters.  It  takes  some  preliminary  measures 
to  get  the  plan  under  way ;  but  once  it  starts,  it  brings 
in  the  monc}'  promptly  and  cuts  the  cost  of  getting 
it.  Why  not  recognize  that  on  the  part  of  many  cus- 
tomers who  do  not  take  the  10-day  discount,  there  is 
not  the  slightest  expectation  of  being  able  to  pay  in 
30  days,  and  on  the  part  of  others  who  can,  no  inten- 
tion of  doing  so?  That,  of  course,  is  after  allowing 
for  those  who  make  a  practice  of  observing  net  terms. 
And,  having  gone  that  far,  wh}-  not  endeavor  to  place 
these  customers  on  terms  which  they  can  and  will 
observe  and  reserve  regular  open-account  terms  for 
those  who  are  able  and  disposed  to  fulfil  them? 
There  is  one  best  way  to  shortcut  collection  expense. 
That  the  trade  acceptance  can  be  used  to  make  col- 
lection letters  unnecessary  admits  of  no  argument. 
Getting  a  customer  on  trade  acceptance  saves  all  the 
collection  letters  you  would  otherwise  send.  There 
is  not,  after  all,  anything  reall\'  formidable  about  the 
trade  acceptance.  It  is  more  than  anything  else, 
perhaps,  a  post-dated  check,  at  least  where  it  is  not 
discounted.  In  fact,  some  of  our  acceptance  cus- 
tomers charge  acceptances  against  their  bank  accounts 
when  they  are  accepted  and  then  promptly  forget 
about  them. " 

Question 
P  In  the  light  of  your  knowledge  of  trade  acceptance 
use  and  practice,  to  what  extent  do  you  consider  the 
above  claims  justified?- 


COLLECTIONS  373 

Problem   18H 

C0LLECT1N(;    THE    BiJ.LS    OR    AccEPTlNCi    THE 

Returxei)  (Joods 

A  successful  and  very  highly  esteemed  millinery 
merchant,  Mr.  A.,  states  that  in  the  first  ten  years  of 
his  experience  it  annoj^ed  him  greatly  when  the  ladies 
attempted  to  return  hats  which  they  had  purchased 
from  him  and  had  worn  one  or  more  times.  It  was 
his  earlier  custom  to  endeavor  to  collect  from  his 
customers  and  make  them  keep  the  goods. 

In  the  second  ten  years  of  his  experience,  A.  decided 
that  it  was  not  worth  his  while  to  argue  with  his  clients 
about  the  matter,  and  usually  accepted  the  returned 
goods,  himself  bearing  with  rather  bad  grace  the 
losses  which  resulted  from  this  policy.  During  the 
last  decade,  however,  he  has  followed  a  much  more 
liberal  policy.  When  hats  are  returned,  he  receives 
them  with  apparent  satisfaction,  stating  that  he  is 
glad  the  customer  brought  the  goods  back  if  in  any 
way  they  failed  to  give  satisfaction.  In  fact,  he  has 
carried  his  liberality  so  far  that  even  when  he  has  made 
up  hats  to  special  order,  which  he  knows  have  been 
worn  by  the  purchaser  for  a  special  occasion,  but  which 
are  returned  on  some  pretense  or  other,  he  replies 
somewhat  as  follows : 

''Madam,  I  am  delighted  to  have  this  hat  back. 
I  really  think  a  great  deal  of  it  and  am  sorry  that  I 
let  you  have  it  at  the  low  price  made.  Really,  you 
know,  I  made  you  a  special  price  which  was  too  low 
for  profit,  because  I  value  your  trade  so  highly.  It  will 
be  money  in  my  pocket  to  have  the  hat  back,  for  sev- 
eral women  have  been  looking  for  just  such  a  hat  and 
are  willing  to  pay  almost  any  price  for  it.  I  can 
assure  you  that  you  have  really  done  me  a  favor  by 
bringing  the  hat  back." 

Mr.  A.  states  that  his  policy  of  the  last  decade  has 
resulted  in  great  financial  success. 


374  PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  How  do  you  account  for  the  financial  "success" 
which  A.  says  has  resulted  from  his  more  recent 
policy? 

2.  To  what  extent,  if  at  all,  should  you  expect  the 
general  policy  outlined  by  Mr,  A.  to  prove  success- 
ful in  other  lines  of  retailing? 

3.  Should  you  expect  such  a  i)olicy  to  bring  finan- 
cial success — 

(a)  In  the  mail-order  business? 

(b)  In  the  wholesaling  or  jobbing  business? 

(c)  In  the  case  of  manufacturers  who  have   a 
large  number  of  customers? 


Problem  189 
Novel  Collection  Methods 

A.  "Occasionally  a  credit  man  or  collector  is 
found  with  a  check  on  his  hands  that  is  returned  un- 
paid— sometimes  post-dated  and  sometimes  bearing 
the  current  date,  given  in  the  ordinary  course  of  busi- 
ness— with  the  reason  for  nonpayment  endorsed  by 
the  bank  'insufficient  funds,'  and  in  many  bank- 
ruptcy proceedings  creditors  are  found  holding  checks 
dishonored  for  that  very  reason.  A  practice  that 
seems  to  be  little  followed  is  that  of  determining  how 
much  short  the  check  is,  and  then  depositing  to  the 
credit  of  the  debtor  enough  money  to  make  the  check 
good. 

"For  instance,  if  you  are  given  a  check  for  $100, 
by  diplomatically  handling  the  matter  with  the  bank 
you  can  find  out  how  much  the  debtor's  account  is 
short.     If  you  cannot  discuss  the  matter  with  an  out- 


COLLECTIONS  375 

of-towii  bank,  possibly  you  can  send  the  check  to  a 
travehng  salesman  and  have  him  call  at  the  bank 
and  get  him  to  ascertain  how  much  the  account  is 
short.  In  the  case  recited,  if  you  learn,  for  instance, 
that  there  is  but  $90  on  deposit,  while  you  have  a 
SlOO  check,  you  can  deposit  $10  to  the  customer's 
credit,  or  have  the  traveling  man  do  it,  and  the  check 
will  be  cleared." 

B.  ''If  all  efforts  to  obtain  security  have  failed 
and  the  account  is  in  a  precarious  condition,  efforts 
should  be  made  to  offset  the  obligation  by  purchasing 
from  the  debtor  something  that  can  be  resold.  Such 
an  offset,  in  the  absence  of  fraud,  is  good  even  if  a 
bankruptcy  petition  should  be  filed  shortly  afterward. 
For  instance,  if  your  customer  runs  a  lumber  mill, 
purchase  the  lumber  even  if  you  know  you  have  no 
use  for  it,  and  sell  it  at  a  slight  discount  if  you  antici- 
pate a  loss  on  his  account.  In  fact,  no  matter  what 
the  debtor  produces,  or  resells,  if  there  is  any  reason- 
able market  for  it  you  can  usually  find  that  market 
and  make  a  ready  sale  of  the  product  by  allowing 
some  slight  discount  under  the  market.  This  is  much 
better  than  to  find  your  debtor  is  so  involved  that 
the  account  will  drift  along,  with  the  prospect  that 
you  will  ultimately  face  a  much  larger  loss  than  the 
slight  discount  you  know  you  will  lose  if  you  accept 
the  wares  of  your  customer  to  apply  as  a  credit  on 
your  claim  against  him.  This  procedure  will  often 
enable  you  to  realize  even  after  some  other  creditor 
has    obtained    security." 

Question 
Do  you  approve  of  the  collection  methods  outlined 
above? 


376  PROBLEMS  IN  BUSINESS  FINANCE 

Pkoblkm   1J)() 

Samim.k  Collection   I.kttkhs* 

Criticize  the  following  "Collection"  Letters: 

A.  A  novel  way  to  collect  small  past-due  accounts  is 
being  used  by  an  eastern  manufacturer,  who,  after 
failing  to  get  any  response  to  his  letters  requesting 
a  check,  sends  the  customer  a  receipted  statement 
worded : 

Tliifs  stateuiont  is  marked  "paid  in  full"  and  receipted 
because  we  have  exhausted  every  means  to  get  you  to  make 
payment. 

The  bill  is  small,  and  if  your  conscience  shcjuld  ever  tell 
you  to  send  us  your  remittance,  which  is  rightfully  due  us, 
we  shall,  of  course,  be  glad  to  get  the  money. 

B.  "It  seems  that  the  only  way  we  can  get  any  remittance 
from  you  on  account  is  to  wire  you  inquiring  what  you 
intend  doing.  This  is  rather  expensive  and  we  have  not 
made  very  great  headway  as  it  is.     The  present  balance 

remaining  due,  $ ,  is  really   .  .  .  months  past  due 

and  is  more  than  one-half  of  those  bills  which  matured  on 
Now,  this  isn't  satisfactory. 

"Our  draft  of  .  .  .  .,  as  we  wrote  you  before,  came  back 
with  the  endorsement:  'Will  send  check  in  a  few  days,' 
and  here  it  is  two  weeks  without  a  word  from  you  in  repl}^ 
to  our  letter  of  the  ....  We  will  not  wait  until  you  get 
ready  to  pay  us.  Unless  we  have  some  assurance  that  some- 
thing will  be  done,  we  are  going  to  hand  an  itemized  account 

*The  following  .suggestions  may  Ijo  helpful: — ^"The  wheel  that 
squeaks  the  loudest  gets  the  grease.  Tiierefore,  it  behooves  every  col- 
lection manager  to  he  consistent  in  dunning  and  insistent  in  demands  for 
payment.  His  follow-up  must  be  regular  and  not  spasmodic  and  one 
must  take  advantage  of  every  available  means  to  'l)ring  home  the  ba- 
con.' There  are  a  great  many  other  jioints  that  can  be  brought  out,  but 
principally,  (a)  We  never  let  the  follow-up  get  behind.  Try  to  be  one 
or  two  days  ahead  of  schedule  rather  than  one  day  behind,  (b)  Never 
bluff,  (c)  Never  let  a  customer  forget  his  promises,  (d)  Don't  use 
'  rubber  stamp '  collection  methods.  Individualize,  (e)  Handle  each 
account  on  its  merits  and  don't  threaten  to  sue  some  customer  when  a 
nice,  diplomatic  letter  would  have  made  the  collection.  A  harsh 
letter  not  only  antagonizes  the  customer,  but,  no  doubt,  loses  him 
for  the  firm.  The  real  collection  manager  not  only  gets  the  money,  but 
retains  the  good  will  of  the  customers  and  keeps  the  accounts  out  of  the 
attorney's  hanfls.  I'nder  the  present  method  we  not  only  keep  our 
accounts  up  to  the  standards,  but  have  reduced  the  number  of  employees 
in  the  collection  department  to  half  the  number  previou,sly  employed 
under  the  old  methods,  making  an  annual  saving  on  the  payroll  of  over 
$3,000  a  year." — (Adapted  from  an  article  by  A.  M.  Tamwrath,  Col- 
lection Manager,  American  Slicing  Machine  Co.,  Chicago,  in  100%, 
May,  It 21,  p.  98.) 


COLLl'X'TIONS  377 

to  our  collectors,  one  week  from  today.  If  you  desire  us  to 
bear  with  you  in  this  case,  you  must  send  us  a  remittance 
upon  which  to  base  our  lenien(!y.  We  believe  in  being 
perfectly  frank  in  the  matter,  and,  this  being  the  case,  we 
must  tell  you  we  are  thoroughly  disappointed  with  the 
present  condition  of  your  indebtedness  with  us." 

C.  "We  return  herewith  your  note,  etc.  We  could  not 
possibly  accept  a  sixty-day  note,  at  the  present  time  for 
your  entire  account — not  that  we  are  unwilling  to  do  so, 
but  we  cannot,  for  this  simple  I'eason  that  we  will  need  this 

money  before We  had  been  depending 

upon  receiving  3'our  remittance,  and  must,  under  the  cir- 
cumstances, request  you  to  make  other  arrangements,  either 
through  your  bank  or  some  available  source,  and  let  us  have 
settlement  in  the  next  week  or  two." 

D.  "It  certainly  seems  strange  to  us  that  you  permit  our 
drafts  to  come  back,  do  not  write,  and  send  us  nothing  to 
applj'  on  your  past -due  account.  We  have  regarded  you  as 
perfectly  good,  and  have  not  felt  apprehensive  about  your 
finally  paj'ing  us,  but  must  confess  our  inability  to  under- 
stand your  treatment  of  us.  We  will  be  frank  and  say  that 
we  want  something  to  apply  on  your  account,  and  will  ask 
you  to  let  us  hear  from  you  before  the   .  .  .   da}'  of  May." 

E.  "The  Collection  Department  refers  your  account  to  us, 
this  morning,  and  we  cannot  help  but  think  that  if  the  pay- 
ments you  made  us  gave  us  half  the  pleasure  it  did  to  receive 
your  orders,  what  a  pleasant  time  we  would  have  doing 
business  together.  Usually,  when  one  buj's  goods  in  .  .  . , 
even  under  the  most  unfavorable  conditions,  he  certainly 
should  have  disposed  of  enough  of  them  to  send  us  at  least 
a  liberal  remittance  thereon  in  .  .  .  ;  but  you  are  owing  us 
entirely  for  purchase  from  .  .  .  on — in  fact.  .  .  .  of  the  balance 
now  shown  is  owing  on  invoices  for  .  .  . 

We  are  just  telling  you  how  the  matter  looks  to  us  here. 
The  Collection  Department  seems  unable  to  get  your 
balance  adjusted,  and,  of  course,  we  always  desire,  if  possible, 
to  have  these  little  matters  settled  amicably,  so  that  we  can 
maintain  pleasant  relations.  The  slightest  consideration 
of  the  matter  must  show  that  we  have  been  very  lenient 
thus  far;  caused  you  no  trouble,  simph'  writing  you  from 
time  to  time  endeavoring  to  have  you  make  settlement. 
This  is  our  pohcy  as  regards  every  account  which  we  regard 
as  highly  as  we  do  yours;  but  there  does  come  a  time  when 
we  must  insist  upon  payment .  We  shall  expect  to  hear  from 
you  promptly,  and  in  the  meantime  have  taken  the  liberty  of 
over-ruling  the  suggestion  of  the  Collection  Department,  but 
desire  to  have  a  remittance  from  you." 

CLast  four  quoted  from  Lawrenc-e,  Making  Him  Pay) 


378         PROBLEMS  IN  BUSINESS  FINANCE 


H.     FINANCIAL  ASPECTS  OF  ADVERTL>IN(; 

Problem  191 
Relation  of  Advertisinc;  to  Sales 

"The  real  way  to  decrease  your  advertising  expenses 
is  to  increase  it.  It  will  start  your  business  growing 
and  pretty  soon  you  will  find  the  advertising  expendi- 
tures can't  keep  up  with  the  growth.  The  truth  is  that 
a  decent  advertising  appropriation  is  an  investment, 
not  an  expense." 

In  support  of  this  statement  the  following  data  are 
given  regarding  a  distributor  of  men's  clothing: 

First  Half  Second  Half 

1918  1918  1919 

Percentage  of  advertising 
appropriation  to  sales  of 
previous  period 2.40%         6.35%  9.46% 

Percentage  of  sales  of  cur- 
rent period  to  sales  of  pre- 
vious period .  63.78%      126.40%      197.80%^ 

Percentage  of  advertising 
expenditure  of  current 
period  to  sales  of  current 
period 3.77%  5.00%  4.78% 

Gross  profit 41.40%       38.60%        37.70% 

Net  profit 4.81%  8.24%        11.02% 

"As  you  increase  your  advertising,  you  increase  your 
business  so  fast  that  your  expenditure  turns  out  to  be 
a  much  smaller  percentage  than  the  percentage  of  your 
appropriation." 

Question 

Do  you  agree  with  the  statements  made  and  the 
conclusions  drawn? 


ADVERTISING  AND  FINANCE  379 

Pkoblkm   ID'-i 

Wa.-j  Advertisin(;  Responsible  for  the  Financial 
Success  of  This  Concern? 

Recently  there  appeared  an  article  in  an  advertising 
periodical  which  attributed  the  growth  of  the  Habirshaw 
Electric  Cable  Company  almost  entirely  to  its  method 
of  advertising.  Briefly  stated,  the  company  endeavors 
by  means  of  its  advertising  to  push  the  use  of  those  appli- 
ances not  made  by  it,  but  in  conjunction  with  which 
its  product  is  used.     The  following  claims  are  made: 

"Very  rarely  does  the  average  man  purchase  even  a 
few  yards  of  electric  wire.  He  certainly  never  buys 
electric  cable.  Habirshaw  makes  nothing  but  electric 
wire  and  cable.  Yet  for  five  years  this  company  has 
been  addressing  the  bulk  of  its  advertising  to  Mr. 
General  Person.  A  purely  technical  product  has  been 
advertised  to  the  general  public.  When  the  company 
started  advertising  on  these  lines,  it  began  with  an 
appropriation  of  $12,000,  of  which  about  $10,000  was 
spent  on  the  man  in  the  street.  This  year  the  company 
will  spend  something  like  $200,000  on  advertising,  and 
at  least  $150,000  of  it  in  efforts  to  reach  people  who  do 
not  buy  electric  wire.  If  that  seems  to  deepen  the 
mystery,  hsten!  Five  years  ago  the  company  was 
doing  an  annual  business  of  only  $800,000,  and  it  stood 
twenty-eighth  on  the  list  of  electric  wire  and  cable 
manufacturers.  Today  it  claims  to  be  the  largest  house 
of  its  kind  in  the  world,  and  is  reported  to  be  doing  a 
business  of  $16,000,000  a  year.  In  five  years  the  busi- 
ness has  been  increased  2,000  per  cent,  and  the  adver- 
tising appropriation  1,500  per  cent.  At  the  same  time 
the  selling  cost,  including  the  advertising,  has  been 
reduced  50  per  cent.  It  is  a  remarkable  record — and 
none  of  it,  it  is  said,  was  due  to  the  war.  The  Habirshaw 
Company  ascribes  this  great  and  rapid  growth  almost 
entirely  to  its  manner  of  advertising,  plus  the  mer- 
chandising idea  on  which  the  advertising  and  prac- 
tically all  of  its  selling  efforts  were  based." 

{Punter's  Ink,  March  24,  1921,  p.  49,  ff.) 


380  PROBLEMS  IN  BUSINESS  FINANCE 

Question 
Based  on  the  inforniation  above  given,  do  you  be- 
lieve that  advertising  has  played  the  important  part 
claimed  in  the  financial  success  of  this  company? 


Problem   193 
The  Financial  Gains  From  Advertising 

Advertising  is  a  curious  thing.  It  has  had  to  be 
taken  on  faith  for  the  most  part.  You  can't  usually 
measure,  its  effect.  Men  who  advertise  and  find  their 
business  prospering  keep  on  advertising.  Men  whose 
business  has  been  slow  sometimes  try  advertising  and 
find  their  business  suddenly  growing.  Then  they  keep 
on  advertising.  That's  the  reason  you  can't  measure 
its  results.  Many  merchants  pay  for  advertising  and 
get  only  publicity. 

Question 
How  can  a  concern  determine  the  amount  of  money 
which  should  be  spent  for  advertising? 


Problem   194 
Advertising  and  Business  Profits 

Many  concerns,  in  1919,  due  to  unusual  business 
activity,  made  an  extremely  high  return  on  their 
investment.  Business  seemed  to  be  growing  better. 
In  fact,  many  lines  of  goods  seemed  almost  to  sell 
themselves  at  any  price  asked  by  the  producer. 


ADVERTISING  AND  FINANCE  381 

Question 
Under    these    circumstances,    would    it    have    been 
sound  financial  policy  for  such  concerns  to  incur  heavy 
expenses  for  advertising? 

(Reference:     Printer's  Ink,  June  30,  1921.) 


Pkoblkm   1!),> 
Advertising  To  Aid  "Seasonal"  Bcsinehs 

It  is  a  well-known  fact  that  a  good  many  lines  of 
business  are  more  or  less  ''seasonal."  Commenting  on 
this  condition,  a  recent  writer  has  said: 

"One  of  the  great  things  that  this  powerful  force  of 
advertising  can  do  for  American  business  is  to  help 
straighten  out  sales  curves.  If  you  were  sure  of  an 
even  market,  month  by  month  throughout  the  year, 
how  much  would  it  save  you?  How  much  do  you  lose 
during  your  low  months — not  how  much  do  you 
lose  in  actual  dollars  and  cents,  but  how  much  do  you 
lose  in  momentum? 

(Pnnter's  Ink,  Feb.  24,  1921,  p.  89,  ff.) 

Questions 

1.  What,  specifically,  are  the  chief  financial  losses  of 
seasonal  selling? 

2.  To  w^hat  extent  do  you  believe  that  advertising 
can  remedy  the  evils? 

3.  In  the  case  of  manufactured  products,  are  there 
necessarily  goods  which  have  only  seasonal  sales? 


382  PROBLEMS  IN  BUSINESS  FINANCE 

Phcblem   19() 
I)ealp:u  Advertising  and  the  Distributer 

"You  hear  a  lot  of  talk  about  the  "cancelation  evil" 
these  days.  A  lot  of  manufacturers  declare  that  many- 
retailers  have  been  guilty  of  a  moral  misdemeanor 
because  they  have  canceled  their  orders,  and  that  they 
have  thrown  a  great  burden  upon  industry.  I  am  not 
advocating  the  practice,  but  what  about  the  manufac- 
turer who  sells  you  goods  largely  on  the  strength  of  his 
work  with  consumcM's  to  help  you  dispose  of  them,  and 
then  turns  around  and  cancels  his  advertising?" 

Questions 

1.  Are  the  manufacturers  who  at  present  cut  their 
appropriations  for  advertising,  playing  the  game  fairly 
with  their  retail  distributers? 

2.  Would  it  be  justifiable  for  a  retailer,  under  the 
circumstances,  to  cancel  his  contracts  with  the 
producer? 

3.  Is  continued  or  increased  advertising,  under 
present  conditions,  financially  justifiable? 


Problem  197 
Does  Advertising  Aid  the  Credit  Seeker? 

"Investors  tumbled  over  themselves  to  buy  the 
recent  $20,000,000  bond  issue  of  the  Vacuum  Oil 
Company.  At  the  same  time  the  great  city  of  New 
York  had  to  take  its  hat  in  hand  and  go  from  bank  to 
bank,  begging  for  enough  money  to  pay  its  current 
bills.  The  security  in  each  case  was  unquestioned,  but, 
nevertheless,  the  partiality  of  the  investor  for  the 
private  borrower  was  decided.  Something  similar  has 
happened  on  many  other  occasions  recently.     Why? 


ADVERTISING  AND  FINANCE  383 

The  answer  is  that  ten  credit  risks  are  offered  for  every 
one  accepted.  The  lender  selects  his  risks  with  extreme 
care.  An}^  margin  of  value  in  favor  of  one,  usually 
decides  the  choice.  In  many  cases  advertising  is  this 
margin.  How  it  helps  the  borrower  is  explained  by 
the  following  list  of  recent  short-term  notes  of  big 
national  advertisers,  the  rate  of  interest  and  asking 
price  of  which  is  due  somewhat  to  the  prestige  gained 
through  consistent  advertising." 

Security                          Rate  Due  Asked 

American  Tobacco 7  Nov.,        1921  100^ 

Cudahy  Packinji  Co 7  .July  15,  192G  99 

H.  J.  Heinz  Co 7  Dec.    1,    1930  98 

Liggett  &  Myers 6  Dec,        1921  993^ 

Proctor  &  Gamble 7  March,     1922  100^ 

R.  J.  Reynolds  Tobacco..  .      6  Aug.,        1922  97^ 

Swift  &  Co 7  Aug.  15,  1921  99}/^ 

Westinghouse  Elec.  Co. .  .  .     7  April  19,  1925  99% 

(Reference:     Printer's  Ink,  April  14,  1921,  page  1.) 

Qu€Sti07lS 

1.  Do  you  think  that  the  comparison  above  made 
is  a  fair  one? 

2.  In  what  types  of  concerns,  if  any,  do  you  think 
that  national  advertising  of  the  product  will  aid  in 
securing  credit  at  a  more  favorable  rate? 

3.  Fundamentally,  what  are  the  chief  causes  which 
make  a  borrowing  concern  a  "prime"  risk? 


Prcblem   198 
How  Much  Can  a  Candy  Company  Afford 
To  Spend  in  Advertising.'' 

The  following  problem  was  submitted  by  the 
treasurer  of  a  good-sized  candy  manufacturing  concern 
in  April,  1921.     The  proper  answer  to  the  questions 


384  PROBLEMS  IN  BUSINESS  FINANCE 

which  he  raises  will  be  of  very  vital  interest  to  him, 
since  the  sales  have  been  falling  off  rapidly  and  the 
company  which  he  represents  has  recently  completed  a 
new  plant. 

I.   ChAKACTEK    of    liu.SlNESS. 

a.  High-{j;radp  coiifectionory,  chocolates,  fancy  pack- 
ages, retailing  at  $1.00  to  $1.50  per  lb. 
6.  Go()(l-gia(l(^  l)ulk. 
c.  oc,  10c  and  loc  specialties, 
'"a"  Is  on  trade-mark  goods  and  represents  desired  kind 
of  distribution.     "/>"  Is  to  take  up  suplus  production,     ''r" 
Is  for  added  profit,  representing  chai'acter  of  goods  that  can 
l)e  sold  without  extra  sales  cost  thjough  existing  dealers. 

II.  DisTRiRUTiox.  Distrilmtion  now  through  4,000  to 
'),00()  retailers,  lai'gely  drug  stores,  throughout  states  east 
of  the  Mississippi.  Sales  through  force  of  twenty  .salesmen. 
Three  or  four  jobbers  togethei-  with  their  salesmen  are  used 
in  cei-tain  territories. 

III.  Volume.  Volume  $1,250,000  to  SI  ,750.000.  Distri- 
l)Ution  is  not  as  intensive  as  it  should  l)e  or  volume  would 
be  larger  for  the  number  of  dealers  and  the  territories  covered. 

The  relation  between  possible  volume  and  total  invest- 
ment is  from  three  to  five  times  as  great  as  the  total  net 
worth  of  the  high-grade  confectioner.  The  ratio  between 
fixed  investment,  including  machinery  and  fixtures  (but  not 
including  real  estate,  as  it  is  often  leased)and  possible  volume, 
may  be  1  to  7,  8,  9,  or  10,  that  is,  the  volume  may  be  eight 
or  more  times  the  fixed  investment. 

IV.  Margin  of  Profit.  The  net  margin  after  all  ex- 
penses on  business  of  this  character  is  generally  from  7  per 
cent  to  10  pel'  cent  of  the  volume.  Roughly,  the  gross  margin 
above  actual  manufacturing  expenses  at  the  stock  room  is 
from  30  per  cent  to  38  per  cent.  Manufacturing  costs  in 
good  candy  plants  is  necessarily  from  62  per  cent  to  70  per 
of  the  manufacturers'  sale  price.  Out  of  the  30  per  cent  or 
38  per  cent  must  come  administration,  selling,  and  publicity, 
bad  debts,  interest.  For  a  package  for  which  the  manufac- 
turer gees  $1.00,  the  retailer  will  get  from  $1.35  to  $1.50. 
Retailer  aims  to  get  at  least  30  per  cent  on  the  retail  price. 

V.  Publicity.  Business  is  about  fifteen  years  old  and 
previous  publicity  has  been  almost  entirely  in  the  form  of 
store  signs  (both  temporary  and  more  or  le.ss  permanent), 
sample  boxes,  and  window  displays,  a  little  incidental  thea- 
tre program  and  college  magazine  advertising,  and  some 
advertising  in  local  newspapers.     Total  store  help  and  sign 


ADVERTISING  AND  FINANCE  385 

advertising  about  2  pei-  cent  to  21/.  per  cent  of  volume.  U/^ 
per  cent  or  2  per  cent  is  always  necessary,  regardless  of  what 
other  publicity  is  undertaken. 

Questions 

1.  On  how  small  an  expenditure  can  one  hope  to  get 
appreciable  increase  in  volume,  and  through  what 
means  of  publicity? 

Author's  Note:- — Candy  manufacturers  in  general  do 
not  appear  to  have  spent  a  large  relative  amount  on 
advertising.  The  low-grade  producers  are  evidently 
the  heaviest  advertisers,  while  among  the  high-grade 
producers  almost  nothing,  or  at  any  rate  less  than  1 
per  cent  of  their  sales,  is  said  to  be  spent  for  this  pur- 
pose. In  this  connection,  it  should  be  noted  that  the 
ten  best  retail  advertising  men  in  the  country  recently 
gave  the  following  figures  as  the  proper  amount  of 
gross  business  to  be  set  aside  for  advertising: 

Per  Cent  Per  Cent 

Department  Stores .83/2  Electrical   Stores 0 

Women's  Specialty  Shops  5I/2  Jewelry  Stores f)!^ 

Shoe  Stores 4  Men's  Clothing  and  Fur- 
Millinery  Stores 4  nishing 5 

Music  Stores '. 5^/^  Miscellaneous , 4 

Furniture  Stores -  5^ 

2.  In  what  respects,  if  at  all,  are  the  financial 
aspects  of  advertising  in  the  candy  manufacturing 
business  different  from  what  would  be  found  in  the 
examples  given? 


CHAPTER  IX 
THE  ADMINISTRATION  OF  EARNINGS 

References: 

*Dewing,  Financial  Policy  of  Corporations.  Vol.  i^. 
*  Lough,  Business  Finance,  Part  iv. 
Mead,  Corporation  Finance,  xiv-xviii 

IN  the  problems  which  have  preceded  an  attempt 
has  been  made  to  illustrate  the  sound  principle  of 
finance  which  should  be  followed,  step  by  i^tep, 
from  the  inception  of  the  business  to  the  time  when  its 
earnings  come  in.  If  the  financial  edifice  has  been 
soundly  built  to  this  stage,  there  is  little  danger  that 
the  management  will  go  wrong  in  its  disposition  of 
earnings.  However,  with  a  view  to  illustrating  a  few 
of  the  typical  situations  which  may  arise,  the 
following  problems  are  given. 


Problem  199 

Should  a  New  Building  Have  Been  Financed 
Out  of  Surplus  Earnings? 

"A  large  department  store  was  organized  in  a  city  of 
the  Middle  West.  The  store  was  w^ell  located  and  the 
capital  should  have  been  sufficient.  At  the  start  there 
was  little  competition  and  the  business  prospered. 

The  prosperity,  however,  was  brief.  The  owner  of 
the  store  concentrated  his  attention  on  selling  and 
buying.  He  neglected  credit.  He  paid  all  small  bills 
upon  their  presentation  at  the  cashier's  window ;  larger 
bills  upon  receipt  of  invoice.  He  took  no  measures  to 
keep  idle  funds  active;  he  did  not  try  to  establish  a 
business  reputation  among  bankers  and  moneyed  men; 

386 


ADMINISTRATION  OF  EARNINGS  :iS7 

he  adopted  no  plan  to  equalize  his  supply  of  capital 
with  demand. 

At  length  the  business  required  a  new  building. 
The  younger  members  of  the  firm  advised  establishing 
their  credit  and  borrowing  the  money  they  needed.  A 
new  competitor  had  begun  to  build  and  was  making 
improvements.  One  of  the  merchant's  sons,  exasper- 
ated by  this  move,  spoke  to  his  father.  "See  here," 
he  said,  "we're  behind  time.  Take  the  railways,  the 
skyscrapers,  and  all  the  great  industrial  works  for  that 
matter.  Could  they  have  been  built  up  by  following 
our  method?  Do  they  keep  their  capital  idle  while 
waiting  for  it  to  gi-ow?  Why  not  borrow  the  money 
for  this  new  building?  We  may  be  obliged  to  ask  for 
credit  some  day  to  carry  on  oui'  business.  It  is  better 
to  establish  it  now  while  we  can." 

The  senior  member  of  the  firm,  however,  was 
obdurate.  He  would  do  nothing  until  he  had  accumu- 
lated a  surplus  sufficient  to  cover  the  expenses  of  the 
improvement,  though  he  admitted  that  lack  of  space 
was  a  handicap. 

The  first  two  years,  the  fii-m  managed  to  build  up  a 
considerable  surplus.  This  money  was  kept  in  a 
savings  bank,  drawing  3  per  cent  interest.  The  third 
year,  however,  the  competition  had  so  grown  that  no 
surplus  was  earned.  The  fourth  year  began  with  a 
general  business  dej^ression.  The  balance  in  the  bank 
sank.     Still  the  old  i)olicy  continued." 

((^iic)t('(l  IVdiii  Sliaw.  Iloir  li>  FIniinec  a  Bii^^inrs.^,  7-8.) 

Questions 

1.  Did  the  father  follow  correct  policies — 

(a)  In  his  current  financing? 

(b)  In  the  disposition  of  the  surplus  earnings? 

2.  Do  you  agree  fully  with  the  son's  arguments? 

3.  W^hat  steps,  if  any,  should  you  now  advise  taking 
in  order  to  improve  the  financial  condition  of  this 
business? 


388         PROBLEMS  IN  BUSINESS  FINANCE 

I'kohi.km   ^2()() 
General  I'kohlkm  ox  Dimdkm)   IN;i-i<  v 

The  American  Telephone  and  Telegraph  (.'onipany 
has  for  many  years  been  referred  to  as  an  outstanding 
example  of  a  conservatively  financed  concern.  Its 
present  form  of  organization  dates  back  to  1900,  during 
the  last  fifteen  years  of  which  time  dividends  of  8  per 
cent  on  the  common  stock  have  regularly  been  paid. 
In  addition  to  liberal  maintenance  and  depreciation 
charges  the  company  has  built  up  a  large  surplus 
mainly  out  of  earnings,  but  including  some  premiums 
realized  on  the  sale  of  new  securities.  Only  common 
stock  has  been  issued.  It  has  always  been  the  policy 
of  the  management  to  avoid  placing  any  mortgage 
on  the  property,  and  to  date  the  outstanding  bonds 
are  of  the  debenture  or  collateral  type. 

The  price  range  of  the  stock  has  been  as  follows: 

1901  1905,  Hijih— 18();  ]Any  lll^i  {divideiul  rate  at 
this  time  7 1 2%. ) 

1906-1917,  Hio-h— ISS^s:  Low— 88  (during  the  panic 
of  1907.) 

1918-1920,  High-IOOM;  Low— 90^8. 

1921  (till  Au^^  1st),  High— 1083-^;  Low— 953i. 

(Since  Felmiarv  1,  1921,  the  stock  has  not  sold  below  99!^.  On 
July  30  it  sold  at  105^8.) 

In  February,  1921,  there  was  a  rumor  to  the  effect 
that  the  company  was  planning  some  new  financing. 
This  report  was  denied  bj'  the  management.  Near  the 
end  of  March,  however,  the  directors  authorized  the 
president  to  announce  their  decision  to  establish  9  per 
cent  as  the  regular  annual  rate  of  dividend  to  be  paid 
upon  the  company's  shares,  beginning  July  15,  1921. 

In  deciding  upon  this  change  of  policy  it  w^as  stated 
that  the  management  was  influenced  by  the  "conclu- 
sion that  a  higher  rate  of  return  is  necessary  to  attract 
the  portion  of  capital  which  must  come  from  share- 
holders in  order  that  an  extension  of  telephone  service 
to  keep  pace  with  the  growth  of  the  country  and  the 
demands  of  the  public  may  go  on." 


ADMINISTRATION  OF  EARNINGS  389 

It  was  further  stated  that  there  had  been  no  time 
during  the  last  ten  years  when  the  company's  earnings 
had  not  been  sufficient  to  pay  a  higher  rate  of  dividend 
than  8  per  cent.    The  president  further  states: 

The  (•hiin^;o  in  (lividciid  rates  is  iiotliin^  iiioi'c  tlian  an 
adjustment  to  a  new  s(>t  of  conditions.  It  has  ahvays  been 
the  poHcy  of  the  company  to  pay  such  a  dividend  as  woultl 
maintain  the  niaiket  vahie  of  the  stock  at  a  premium  suffi- 
cient to  attract  subscriptions  to  new  stock  issues. 

The  issue  of  a  fair  proportion  of  new  capital  rather  than 
an  increased  debt  to  take  care  of  the  growth  is  a  necessary 
part  of  any  sound  financial  program.  Before  the  war  the 
8  per  cent  dividend  maintained  the  stock  at  a  satisfactory 
premium. 

Since  the  war,  with  efficiency  and  caiin'niis  e({uivalent  to 
pre-war  standard,  its  stock  is  l)oujiht  and  sold  at  only  about 
par.  Pai'  value  indicates  satisfactory  absorption  of  the 
present  issue,  but  not  demand  for  more  at  the  same  rate  of 
return.  Stock  must  be  quoted  at  a  premium  to  indicate 
a  readiness  to  absorb  further  issues. 

Not  only  present  financial  conditions  governing  the  status 
of  this' and  other  investment  securities  have  been  considered, 
but  also  the  probable  coiuHtions  in  tli(>  future. 

In  commenting  on  this  action  of  the  American 
Telephone  and  Telegraph  Company,  the  financial 
editor  of  one  of  the  daily  papers  wrote  as  follows  on 
March  30,  1921 : 

Some  criticized,  some  condeiimed  (hi-ectors  of  American 
Telephone  for  increasing  the  dividend.  The  increase  natu- 
rally attracted  more  attention  than  would  a  change  in  the 
dividend  in  any  othei-  coi'poi-ation  in  the  countiy,  paitly 
because  the  company  serves  so  many  pr^ople,  partly  because 
more  people  own  stock  of  the  Ameiican  Telephone  Company 
than  of  an}'  other  coi'];o.'ation  in  the  world.  The  number  of 
stockholders  is  in  the  vicinity  of  140,000.*  Soiue  said 
yesterday  that  the  dividend  increase  was  the  most  stupid 
thing  directors  ever  d  d.  Others  said  that  it  was  the  most 
clever  thing  they  ever  did. 

Those  who  argued  that  it  was  stupid  said  it  was  a  poor 
time  to  advertise  coiporate  [)rosperity  when  there  is  so 
much  laboi-  um-est  ar.d  especially  when  the  company's 
largest  subsidiary,  the  New  York  Telephone  Company,  is 
pleading  poverty  as  an  excuse  fgr  inci'cased  telephone  I'ates 

*  Author's  Note. — The  reported  number  of  stockholders  had  increased 
to  about  160.000  by  the  first  part  of  July,  1921. 


390  PROBLEMS  IN  BUSINESS  FINANCE 

in  its  tt'rritor}'.  Tlu'  iiK'i-('as(>  in  ils  rates  r(>cently  allowed 
has  not  yot  been  made  pernuuient  by  the  up-state  pulilie 
service  conunission  of  New  York. 

The  dividend  increase  was  characterized  as  the  wisest 
thing  directors  have  ever  done  by  those  who  were  looking 
at  it  tVoai  the  standpoint  of  a  financial  operation,  pure  and 
siinpl(>.  The  last  few  years  the  coni[)any  has  been  unable__ 
to  raise  money  for  extension  jiurposes  by  selling  stock,  for 
it  nuist  sell  its  stock  at  jKir  or  better,  l^onds  and  notes 
have  been  the  me(Ua  of  financing.  Hankers  have  not  looked 
with  good  favor  on  this  policy,  for  in  order  to  maintain  the 
credit  of  any  corporation  it  is  necessary  to  maintain  a  certain 
ratio  between  fixed  and  contingent  liabilities.  Financing 
through  bond  or  note  issues  entails  an  increase  in  fixed 
liabilities,  while  an  increase  in  stock  means  an  increase  in 
contingent  liabilities.  So,  in  order  to  maintain  the  highest 
credit  for  the  company,  it  was  necessary  to  cone  to  a  point 
where  new  money  would  l)e  raised  by  the  sale  of  stock 
rather  than  by  the  sale  of  additional  fixed  interest-bearing 
securities.  That  could  not  be  done  with  the  stock  on  an 
8  per  cent  dividend  basis.  It  can  be  done  with  the  stock 
on  a  9  per  cent  basis. 

Earnings  full>'  justify  the  new  late. 

On  May  11,  1921,  it  was  announced  that  the  directors 
had  voted  to  offer  $90,000,000  new  stock  to  stock- 
holders at  par,  stockholders  of  record  on  May  20th 
being  entitled  to  subscribe  until  July  20th  for  new 
stock  in  the  ratio  of  one  new  share  for  each  five  shares 
held.  Latest  information  indicates  that  this  new  issue 
has  been  rapidly  absorbed  through  the  direct  selling 
method. 

Questions 

1.  What  appear  to  you  to  be  the  real  reasons  for 
this  increase  in  dividend? 

2.  Taking  the  long-run  point  of  view,  do  you  con- 
sider this  increase  in  dividends  a  sound  policy? 

3.  Would  the  same  reasons  exist  for  increasing  the 
dividend  on  the  stock  of  a  large  industrial  concern? 
Of  a  small  industrial  concern? 

4.  Would  a  concern  whose  stock  is  not  hsted  on 
any  exchange  be  faced  with  a  similar  problem? 

5.  Would  a  concern  whose  stock  is  narrowly  owned 
be  confronted  by  such  a  problem? 


ADMINISTRATION  OF  EARNINGS  391 

6.  Should  you  expect  the  continuance  of  this  rate 
of  dividend  (9%)  to  be  more  certain  in  the  case  of 
a  pubhc  utility  than  in  the  case  of  an  industrial 
concern?     Why? 

7.  What  relation,  if  any,  does  the  wide  distribution 
of  ownership  and  the  customer  ownership  of  shares 
have  to  the  financial  program  above  outlined? 


Pkohlem  "iOl 

Relation  of  Dividend  Declahatiox 

TO  Emergency  Financin(; 

The  S.  Rubber  Tire  Company  is  a  well-managed 
concern  with  generally  excellent  credit.  It  has  had  a 
very  satisfactory  dividend  record.  It  had  been  borrow- 
ing largely  in  the  open  market,  keeping  its  bank  lines 
in  reserve.  By  the  end  of  1920,  however,  even  though 
its  credit  was  still  good,  there  was  practically  no 
market  for  commercial  paper,  because  of  the  generally 
depressed  business  conditions.  This  concern  was 
forced  to  resort  to  its  banks  early  in  1921  in  order  to 
borrow  enough  money  to  pay  off  its  maturing  paper. 

The  S.  Rubber  Tire  Company  sold  its  tires  largely 
to  manufacturers  of  automobiles.  With  the  general 
slump,  therefore,  orders  practically  stopped  and  a  large 
portion  of  its  receivables  became  frozen.  Further,  they 
had  made  commitments  for  the  purchase  of  fabric  to 
which  they  were  definitely  held.  Hence  they  were  in 
the  position  of  being  forced  to  bu}^  a  good  deal  of  this 
material  at  a  high  price  when  the  market  was  ofT.  On 
the  whole,  the  company  was  in  an  unfavorable  rather 


392       pr()blp:ms  in  business  finance 

than  in  a  dangerous  position,  since  its  earnings  for  the 
year  1920  had  been  very  good,  and  the  company 
through  conservative  management  had  built  up  a  large 
surplus.  Its  current  ratio,  from  the  quantitative  point 
of  view,  was  highly  satisfactory,  nor  were  its  current 
liabilities  higher  than  in  normal  times.  Though  sales 
for  the  first  six  months  of  1921  were  low,  the  business  of 
this  company  began  to  pick  up  about  the  middle  of  the 
year;  j^et,  because  of  their  commitments,  and  the  like, 
the  profit  on  these  sales  was  very  low.  A  good  deal 
was  also  owed  to  the  trade. 

Thus  the  concern  was  in  the  middle  of  1921  con- 
fronted with  the  problem  of  financing  its  purchases  of 
materials  for  the  next  year's  business.  In  order  to 
pay  for  these  materials  which  would  be  coming  in  dur- 
ing the  winter  months,  an  amount  of  credit  far  in  ex- 
cess of  that  which  the  banks  would  be  willing  to  lend 
was  needed. 

Finally,  the  management  decided  to  raise  the  needed 
funds  to  pay  ofT  their  creditors  and  extend  their  bank 
lines  by  selling  ten-year  serial  debentures,  carrying  a 
high  rate  of  interest.  Just  at  this  time,  however,  the 
dividend  on  the  common  stock  (very  little  preferred 
stock  had  been  issued)  was  coming  due.  This  stock 
was  very  widely  held.  The  dividend  had  been  earned 
by  a  considerable  margin,  and,  as  stated  before,  the 
company  had  a  very  creditable  surplus.  The  directors 
of  the  company,  therefore,  were  confronted  with  a 
double  problem  (a)  that  of  financing  their  next  year's 
purchases,  (b)  that  of  passing  or  declaring  their 
dividend. 

Qiiestions 

1.  Do  you  think  the  company  chose  the  best  method 
of  raising  working  capital  needed  to  finance  its  pur- 
chases?    If  not,  what  alternatives  can  you  suggest? 

2.  In  view  of  the  situation  presented,  what  action 
should  the  directors  have  taken  on  the  matter  of  the 
dividend  payment? 

3.  Will  your  answer  be  the  same  whether  or  not  the 
stock  is  listed  on  some  exchange? 


ADMINISTRATION  OF  EARNINGS  303 

Probliom  'HH 
Shall  Dividends  bk  Di-xlaked  or  Shall  Earnings 

BE    I'SKD    FOR    PlAXT    EXTENSIONS? 

The  A.  B.  C.  Shoe  Company  has  had  a  highly  credit- 
able financial  history  dating  back  for  almost  one 
hundred  years.  It  has  always  been  their  policy  to 
make  liberal  provision  for  depreciation  and  main- 
tenance. The  common  stock  is  rather  closely  held, 
being  largely  in  the  hands  of  six  men,  almost  all  of 
whom  are  also  officers  of  the  concern.  The  preferred 
stock,  cumulative  at  7  per  cent,  is  widely  held.  This 
stock  was  issued  with  the  provision  that  if  dividends 
in  excess  of  10  per  cent  should  be  declared  on  the 
common,  the  preferred  should  share  equally  with  the 
common.  The  agreement  under  which  the  preferred 
stock  was  issued  also  provides  that  the  ratio  of  current 
assets  to  current  liabilities  shall  never  be  allowed  to 
fall  below  175  per  cent,  and  if  it  should  fall  below  this 
point  the  voting  power  shall  vest  solely  in  the  preferred 
stockholders,  who  otherwise  have  no  voice  in  the 
control.  The  company  is  under  no  obligations  to 
retire  the  preferred  stock  out  of  earnings  at  any  time, 
nor  can  it  convert  the  preferred  into  common  stock  or 
other  types  of  securities.  No  bonds  or  debentures  are 
outstanding  and  no  mortgages  can  be  placed  on  the 
plant  without  the  consent  of  75  per  cent  of  the  preferred 
stockholders. 

During  the  year  1920  this  company,  as  was  the  case 
with  practically  all  shoe  concerns,  lost  a  good  deal  of 
money,  so  that  by  the  end  of  the  year,  though  the 
current  position  was  still  reasonably  satisfactory  from 
the  banker's  point  of  view,  the  common  stockholders 
began  to  fear  that  the  preferred  stockholders  might  get 
the  control.  However,  the  company  took  its  inventory 
losses  at  once,  cleaned  out  its  old  stock,  and  early  in 
1921  put  itself  in  a  relatively  strong  position. 

As  the  old  inventory  had  been  worked  off,  the  A.  B. 
C.  Company  was  able  to  buy  raw  material  at  the  lowest 
market.  Accordingly,  its  costs  of  production  were 
lower   than    those   of   any   of   its   active   competitors 


394  PROBLEMS  IN  BUSINESS  FINANCE 

making  the  same  grade  of  shoes.  Because  of  this 
favorable  position,  the  company  was  able  to  make 
lower  prices  to  the  trade  than  could  be  made  by  other 
important  producers.  Consequently,  orders  began  to 
come  in  rapidly,  so  that  by  July,  1921,  there  were 
enough  advance  orders  on  hand  to  keep  the  entire 
factory  going  at  full  capacit}'  until  earl}-  in  1922. 
These  orders  are  at  a  figure  which  will  insure  high 
profits  to  the  conijiany  and  are  seciu'ed  by  very  definite 
contracts  which  give  the  company  the  right  to  cancel 
whenever  it  may  see  fit,  while  the  customers  are 
firmly  held.  The  contracts  were  made  binding  in  this 
manner  largely  because  of  the  company's  unfortunate 
experiences  with  cancelations  in  1920.  At  the  same 
time,  most  factories  turning  out  a  similar  product  are 
doing  ver}'  little  business. 

The  A.  B.  C.  Company,  in  spite  of  its  large  orders 
on  hand,  has  not  been  able  to  operate  its  factory  at 
more  than  70  per  cent  of  normal  capacity,  because  of 
labor  difficulties  which  it  appears  may  continue  for 
many  months.  These  difficulties  center  largely  around 
the  question  of  a  reduction  in  wages. 

In  order  not  to  let  its  orders  get  so  far  behind,  the 
A.  B.  C.  Company  has,  from  time  to  time,  been  having 
part  of  its  work  done  bj'  another  company,  the  N.  Com- 
pany, whose  business  is  slack.  However,  the  goods  pro- 
duced by  the  N.  Compan}^  go  out  under  the  trade-mark 
of  the  A.  B.  C.  Company.  This  situation  makes  it  neces- 
sary for  the  latter  to  watch  more  carefully  the  quality 
of  the  work  done  by  the  N.  Company,  as  there  is 
danger  of  inferior  workmanship  which  might  injure  the 
goodwill  of  the  A.  B.  C.  Company.  But  the  arrange- 
ment has  been,  upon  the  whole,  a  mutually  satisfactory 
one  because  the  N.  Company,  filling  its  own  valleys  in 
production  by  means  of  these  orders,  can  afford  to  do 
the  work  even  more  cheaply  than  it  could  have  been 
done  by  the  A.  B.  C.  Company.  It  should  further  be 
explained  that  the  A.  B.  C.  Company  also  owns  a  little 
subsidiary  company  which  is  engaged  in  making  shoes 
of  the  A.  B.  C.  brand.     This  plant  is  managed  by  a 


ADMINISTRATION  OF  EARNINGS  395 

man  who  can  always  be  depended  upon  for  i)romptness 
and  large  output  at  a  low  cost,  but  who  is  not  keeping 
up  his  work  to  the  (luality  standard  demanded  by  the 
A.  B.  C.  Company. 

On  July  1,  1921^  the  audited  statement  of  the  A.  B.  C. 
Company  showed  a  current  ratio  of  fully  3  to  1.  The 
cash  on  hand  was  relatively  high,  the  inventory  was 
being  purposely  kept  very  low,  while  the  receivables, 
because  of  the  contract  provisions  already  referred 
to,  were  all  of  prime  quality.  The  current  liabilities 
were  practically  all  in  "accounts  payable,"  averag- 
ing not  more  than  ten  days,  as  the  company  was 
taking  all  the  cash  discounts.  Comparatively  little 
was  owed  to  the  bank.  The  surplus  reported  was 
relatively  smaller  than  it  had  been  for  some  years, 
because  of  the  losses  which  had  been  suffered  in  1920. 
However,  it  had  been  considerably  increased  during  the 
first  six  months  of  1921,  until  it  now  amounted  to 
somewhat  more  than  10  per  cent  of  the  total  assets. 
For  about  a  year  no  dividends  had  been  declared  on 
the  common  stock,  though  the  surplus  might  have 
permitted  a  conservative  dividend. 

In  July,  1921,  therefore,  with  the  first  half  year's 
record  an  excellent  one,  and  with  the  prospect  of  a  still 
better  record  for  the  succeeding  six  months  or  more, 
the  question  of  declaring  a  common  stock  dividend  was 
naturally  raised.  As  already  explained,  the  common 
stock  is  in  the  hands  of  a  very  few  men,  who  are  both 
ofticers  and  directors  of  the  A.  B.  C.  Company.  In 
fact,  three  officers  control  the  stock. 

At  a  meeting  held  on  July  15,  1921,  the  question  of 
declaring  a  dividend  of  20  per  cent  on  the  common 
stock,  to  cover  the  year's  operations,  was  seriously 
discussed.  It  was  felt  that  as  practically  no  dividends 
had  been  paid  in  1920  and  as  the  1921  business  appeared 
to  justify  the  policy,  the  stockholders  were  now 
entitled  to  their  rewards.  The  declaration  of  a  divi- 
dend of  this  amount  would,  of  course,  have  neces- 
sitated a  rather  heavy  payment  to  the  preferred  stock- 
holders, so  that  the  aggregate  dividend  payment  would 


396         PROBLEMS  IN  BUSINESS  FINANCE 

have  required  a  large  amount  of  cash.  The  com- 
pany's cash  position,  however,  was  sufficiently  strong 
to  enable  it  to  do  this  and  still  have  left  a  very  com- 
fortable margin  and  a  current  ratio  still  in  excess  of 
2  to  1.  At  this  meeting,  however,  a  very  interesting 
division  of  opinion  arose  and  several  alternative 
policies  were  discussed. 

Mr.  A.,  one  of  the  heaviest  stockholders,  who  man- 
ages the  production  end  of  the  business,  is  much  in  need 
of  some  ready  money  and  is  very  desirous  of  having 
the  high  dividend  declared.  He  prefers  for  the  plant  to 
continue  to  operate  as  at  present,  feeling  that  he  will 
be  able  to*  put  the  large  orders  through  within  a 
reasonable  time. 

Mr.  B.,  who  is  in  charge  of  the  sales  end  of  the  busi- 
ness, is  absolutely  opposed  to  A.  in  this  matter.  He 
has  grown  very  much  annoyed  because  of  the  pressure 
brought  to  bear  on  him  by  customers,  whose  orders 
are  being  frequently  delayed,  due  to  the  lack  of  "capac- 
ity" production  in  the  plant.  He  fears  that  if  this 
condition  continues  the  company  will  lose  very  valu- 
able goodwill.  His  chief  desire  is  to  keep  the  company 
as  strong  as  possible.  Though  there  are  at  present 
no  clouds  on  the  horizon,  he  is  not  so  optimistic  as 
the  others  regarding  the  outlook  for  1922.  He  is 
opposed  to  the  declaration  of  any  dividend  at  the 
present  time  and  feels  that  the  company  should  wait 
at  least  six  months  longer  before  taking  up  this  matter. 

B.  urges,  moreover,  that  the  proper  course  for  the 
company  to  follow  is  to  relieve  the  present  congestion 
in  the  plant  and  keep  the  goodwill  of  the  customers, 
by  investing  the  larger  part  of  their  cash  in  a  new  and 
cheaply  constructed  plant,  which  could  be  built  in 
about  six  weeks'  time  at  a  town  some  distance  away 
in  an  adjoining  state,  where  an  adequate  labor  supply 
can  be  readily  secured. 

This  suggestion  is  considered  an  excellent  one  for 
several  reasons.  In  the  first  place,  the  A.  B.  C.  Com- 
pany has  always  employed  a  number  of  carpenters 
and  general  repair  men,  who  could  generally  supervise 


ADMINISTRATION  OF  EARNINGS  397 

the  construction  of  the  new  plant,  thus  greatly  reducing 
the  cost  of  building.  Further,  it  would  be  possible 
for  the  company  to  send  some  of  its  idle  machinery  to 
the  new  plant.  Also,  as  the  job  could  be  put  through 
in  a  hurry,  it  is  practically  certain  that  the  company 
could  thereby  keep  itself  in  a  strong  position  with  the 
trade  because  of  its  ability  to  fill  their  orders  more 
promptly. 

Mr.  C,  who  controls  the  purchasing  end  of  the 
business,  has  troubles  enough  of  his  own,  and  takes 
no  very  active  part  in  the  discussion  of  policy.  He 
feels,  however,  that  it  might  be  better  merely  to 
declare  a  small  dividend  at  the  present  time,  which 
would  not  make  necessary  the  payment  of  additional 
dividends  to  the  preferred  stockholders.  He  then 
advises  waiting  until  the  end  of  the  year  before  taking 
any  other  definite  steps. 

Mr,  D.,  a  junior  officer  of  the  company,  has  still 
another  plan  to  present.  He  suggests  that  since  their 
subsidiary  company  is  so  successful  in  quantity  output 
and  speedy  production,  though  the  quality  tends  to 
suffer  somewhat,  it  would  be  well  to  divide  the  oper- 
ations of  the  A.  B,  C.  Company,  which  turns  out  two 
grades  of  shoes,  so  as  to  give  all  the  low-grade  work 
to  the  subsidiary.  The  subsidiary  plant,  however,  is 
already  working  to  full  Capacity,  and  the  congestion 
could  not  be  relieved  by  this  change  in  policy  unless 
an  addition  were  made  to  the  plant.  Hence,  D. 
advises  that  the  cash  now  on  hand  be  spent  for  ex- 
tending the  plant  of  the  subsidiary  company. 

Mr.  E.,  who  is  only  slightly  interested  as  a  stock- 
holder but  whose  opinion  is  usually  given  some  weight, 
advises  a  still  different  policy.  He  thinks  that  it 
would  be  better  to  conserve  the  cash,  probably  paying 
no  dividends  at  present,  or  at  any  rate  a  very  low 
dividend.  He  suggests  that  the  filling  of  orders  might 
be  speeded  up  by  letting  out  more  of  the  work  of  the 
A.  B.  C.  Company  to  some  of  the  other  shoe  companies 
whose  plants  are  largel}^  idle. 


398  PROBLEMS  IN  BUSINESS  FINANCE 

Such  is  the  line-up  of  opinion  in  the  directorate  of 
the  A.  B.  C.  Company  at  the  end  of  July,  1921.  No 
action  has  yet  been  taken.  Mr.  A.,  the  heaviest 
stockholder,  is  still  vigorously  contending  for  the 
high  dividend.  He  has,  however,  now  agreed  with 
B.  and  D.  that  some  kind  of  an  expansion  should  be 
made  in  order  to  enable  the  A.  B.  C.  Companj'  to  fill 
its  orders  more  rapidl}'.  This  he  thinks  should  be 
provided  for  by  borrowing  money  or  b}^  selling  more 
preferred  stock. 

Questions 

1.  Give  your  reasons  specifically  for  agreeing  or 
disagreeing  with  any  one  of  the  conflicting  points  of 
view  expressed  by  the  directors. 

2.  If  the  decision  of  the  matter  should  be  left  in 
your  hands  as  an  impartial  arbiter,  what  policy  should 
you  advise  the  A.  B.  C.  Company  to  follow, 

(a)  With  respect  to  declaring  any  dividend  at  all? 

(b)  With  respect  to  the  amount  of  the  dividend 
declared? 

(c)  With  respect  to  relieving  the  present  conges- 
tion in  the  A.  B.  C.  Company's  plant? 

3.  Would  3^our  answer  be  any  different  if  the  pre- 
ferred stock  provisions  did  not  have  to  be  considered? 

4.  As  a  preferred  stockholder,  how  would  you  feel 
about  the  matter? 

5.  Though  this  company's  bank  has  not  yet  been 
consulted,  what  advice  do  you  think  it  would  give  on 
the  questions  raised?     Why? 


ADMINISTRATION  OF  EARNINGS  399 

Problp:m  "ZOi) 
How  Large  a  Surplus  Should  a  Concern  Have? 

An  officer  of  a  large  investment  house  was  on  one 
occasion  asked,  "How  large  a  surplus  should  the 
average  industrial  concern  build  up  out  of  earnings?  " 

As  he  was  uncertain  what  answer  should  be  given, 
he  accordingly  made  a  study  of  the  actual  surpluses 
shown  by  fifty-seven  leading  industrial  concerns  in 
the  United  States  at  the  end  of  1918.  These  concerns 
were  all  engaged  in  different  kinds  of  enterprise  and 
their  combined  balance  sheet  showed  total  assets  of 
$4,641,287,412.  It  was  further  found  that  the  com- 
bined balance  sheets  disclosed  a  surplus  equivalent 
to  18.11  per  cent  of  the  total  assets  (or  liabilities.) 
As  a  result  of  these  computations,  the  answer  was 
made  to  the  inquirer  that  obviously  from  15  per  cent 
to  20  per  cent  would  be  a  very  satisfactory  proportion 
which  the  surplus  should  bear  to  the  total  assets. 

A  later  study  of  the  companies  whose  balance  sheets 
were  included  in  the  analysis  made  by  the  investment 
house,  reveals  the  fact  that  by  June,  1921,  seven  of 
these  corporations  had  passed  both  common  and  pre- 
ferred dividends,  nine  others  had  passed  their  common 
dividends,  two  had  reduced  their  common  dividends, 
while  three  had  never  paid  dividends  on  their  common 
stock,  and  one  had  been  absorbed  by  another  company  in 
order  to  avoid  bankruptcy.  This  entire  group  of  con- 
cerns was  composed  of  those  which  are  ordinarily  regard- 
ed as  among  the  financially  strongest  in  the  country. 

A  member  of  another  investment  house,  not  so 
large  but  even  more  conservative,  expressed  his  opinion 
to  the  effect  that,  in  the  long  run,  for  safe  financing  an 
industrial  concern  should  put  a  dollar  back  into  the 
business  for  every  dollar  paid  out  in  dividends  on 
common  stock.  This  opinion  is  based,  he  says,  on 
his  study  of  the  most  conservatively  financed  concerns, 
with  the  longest  record  of  success. 


400  PROBLEMS  IN  BUSINESS  FINANCE 

Questions 

1.  Based  on  the  evidence  given,  should  you  consider 
it  safe  to  assume  that  18.11%  of  the  assets  is  a  satis- 
factory surphis  for  an  industrial  concern  to  build  up? 

2.  Would  the  fact  that  a  third  of  the  companies  cited 
were  in  more  or  less  serious  financial  difficulties  in  the 
first  part  of  1921  influence  your  opinion  on  this  matter? 

3.  Would  you  agree  with  the  general  rule  laid  down 
by  the  second  investment  house? 

4.  Should  you  consider  it  more  or  less  desirable  for 
a  small  industrial  concern  to  build  up  a  comparatively 
large  surplus  than  for  the  same  policy  to  be  followed 
by  a  large  concern? 

5.  Do  you  see  any  reasons  for  following  a  different 
policy  in  regard  to  the  creation  of  a  surplus  for  a  public 
utility  company  than  for  an  industrial  concern? 

6.  How,  in  your  opinion,  should  a  surplus  be  in- 
vested? 

7.  Do  you  see  any  particular  disadvantages  which 
might  result  from  the  building  up  of  a  large  surplus 
in  a  business? 


Problem  204 

Shall  Competitors  Be  Bought  Up  With 

Surplus  Funds? 

The  Z.  Cotton  Manufacturing  Company  found 
itself  heavily  stocked  with  raw  cotton  at  the  time 
when  sales  began  to  slump.  The  management,  feeling 
less  optimistic  than  its  competitors,  began  to  protect 
itself  against  the  probable  drop  in  prices  by  selling  its 
cotton  for  future  delivery,  when  there  seemed  to  be 
no  market  for  the  finished  goods.     Accordingly,  within 


ADMINISTRATION  OF  EARNINGS  401 

a  few  months,  while  the  competing  mills  were  without 
orders  and  had  all  their  resources  tied  up  in  inventory 
bought  at  top  prices,  the  Z.  Company  had  cleared  out 
practically  all  of  its  inventory,  had  a  large  amount  of 
cash  on  hand,  and  was  ready  to  buy  raw  cotton  at  the 
bottom  of  the  market. 

The  president  of  the  Z.  Company  says  that  several 
questions  having  to  do  with  the  financial  policy  of  the 
company  are  now  being  considered  by  his  organization : 

A.  Shall  the  Z.  Company  cut  its  prices  on  cotton 
cloth  to  a  point  where  many  of  its  competitors  will  be 
forced  into  bankruptcy? 

B.  Should  the  Z.  Compan}'  use  some  of  the  surplus 
funds  which  it  now  has  to  buy  out  its  failing  competi- 
tors? 

C.  Assuming  that  the  Z.  Company  is  agreeable  to 
purchasing  some  of  the  competing  mills,  provided  it 
can  get  them  cheap,  the  question  is  raised,  "When  is 
a  cotton  mill  cheap?" 

At  the  present  time  it  would  cost  two  or  three  times 
as  much  to  reconstruct  a  mill  as  before  the  war. 

(a)  Would  a  mill,  therefore,  be  worth  buying  if 
it  could  be  taken  over  at  the  pre-war  cost  of  repro- 
duction, less  depreciation? 

(6)  Even  if  this  low  figure  could  be  secured, 
would  it  be  a  wise  financial  policy  to  buy  out  com- 
petitors? 

Questions 

1.  What  advice  would  you  give  the  president  of  the 
Z.  Company  on  the  various  questions  raised  by  him? 

2.  If  you  do  not  advise  buying  up  competitors,  just 
what  would  you  advise  the  Z.  Company  to  do  with 
its  surplus? 

3.  Do  you  think  it  advisable  for  a  concern  to  follow 
a  ''fluctuating"  dividend  policy,  or  is  it  wiser  to  keep 
the  common  stock  dividends  fairly  even  from  year  to 
year?  Does  the  nature  of  the  business  or  the  extent 
and  character  of  its  ownership  affect  your  decision? 


PART  IV 

FINANCIAL  DIFFICULTIES  AND 
THEIR  SIGNIFICANCE 


CHAPTER  X 

FINANCIAL  INVOLVEMENTS, 

ADJUSTMENTS,  RECEIVERSHIPS, 

BANKRUPTCIES,REORGANIZATIONS,ETC. 

References: 

*Dewing,  Corporate  Promotiotis  and  Reorganizations,  518-576. 

Dewing,  Financial  Policy  of  Corporations,  Vol.  v.,  13-G5,  102-187. 
*Kttinger  and  Golieb,  Credits  and  Collections,  307-357. 
*Lough,  Business  Finance,  Part  v. 
*Lyon,  Corporation  Finance,  Part  ii.,  220-307. 

Mead,  Corporation  Finance,  xxx-xxxii. 

Mercantile  Credits  (The  Ronald  Pre.ss  Company),  196-245. 


IT  has  been  the  aim  of  this  book  to  deal  with  the 
common  financial  problems  of  the  small  and 
medimn-sized  concerns.  Yet,  just  as  some  of  the 
greatest  advances  in  physiological  and  medical  science 
have  been  made  possible  by  the  examination  of  the 
abnormal  and  by  the  dissection  of  the  dead  bod}^  so 
it  is  frequently  easiest  to  illustrate  the  sound  principles 
of  Finance  by  calling  attention  to  the  difficulties  which 
result  when  these  principles  are  departed  from. 
Furthermore,  so  few  concerns  are  reallj^  successful,  and 
so  many  of  the  smaller  ones  fail,  that  financial  diffi- 
culties of  some  sort  can  almost  be  said  to  be  a  very 
common  thing,  particularly  at  present.  It  is  hoped, 
therefore,  that  the  following  problems  will  help  to 
drive  home  the  lessons  which  the  preceding  problems 
have  been  meant  to  teach. 

404 


FINANCIAL  INVOLVEMENTS  405 

Exercise  iVo.  VI 

What  Has  Been  the  Actual  Financial  Position  of  Business 
Concerns  at  the  Time  of  Failnre,  Classified  According  to  the 
Nature  of  the  Business,  and  What  Dividends  Have  the  Credi- 
tors Received? 

The  following  letter  has  been  received  from  the 
partner  of  a  large  investment  house: 

I  am  very  interested  in  securing  from  some  source 
statistics  coveiing  a  period  of,  say,  ten  years,  in  connection 
with  the  Hcjuidation  foiced  by  business  difMculties  of  various 
\\nei^  of  jo})l)ers  and  inanufactui-ers.  I  th()u«iht  possilily 
this  might  come  under  your  research  work. 

In  order  to  make  myself  clear,  I  might  state  that  the  infor- 
mation I  am  seeking  is  along  the  following  Lnes:  Suppose 
a  wholesale  grocerv  concein,  which  showed  Capital  and 
Surplus  of  |800,C0d,  Quick  Assets  of  .|4nO,C(;0,  Fixed  Assets 
of  .'$50,000  and  total  cuirent  debt  of  .|2iG,CC0  (these  fgures 
indicating  a  ratio  of  2.25  of  (^uick  Assets  to  Current  Lia- 
bilities), should  be  fo:ced  to  liquidate  thiough  conditions 
caused  by  crop  failures,  bank  failures  or  othei-  cauu^s  beyond 
their  conttol,  what  has  been  the  average  results  of  the 
liquidations  in  respect  to  the  payment  of  the  indebtedness? 

I  took  this  matter  up  with  credit  insurance  companies 
and  also  with  both  of  the  large  meicantile  agencies,  but 
none  of  them  had  this  particulai-  information.  I  thought 
on  account  of  the  classification  risks  that  the  ci'edit  insurance 
companies  would  have  it,  l)ut  the  only  information  which  I 
could  get  from  them  was  that  in  their  exper.'ence  (which,  of 
course,  was  limited  when  compared  to  the  mercantile  agen- 
cies), they  had  foimd,  for  instance,  in  the  jobbing  lines  that 
hardwai-e  liciuidated  to  a  greater  extent  than  groceries. 

(By  eoiifsulting  the  records  of  th<'  local  Bankruptcy  Court  it  should 
he  possible  for  the  student  to  make  a  significant  study  of  this  ])robleni. 
A  few  preliminary  suggestions  of  value  can  he  secured  from  the  Annual 
Number  of  Dutin  Reiriew,  and  particularly  from  the  Anniinl  Report 
of  the  Attorney  General  of  the  T'nited  States.) 


The  General  Ckedit  Siti  ation  in   19*21 

About  the  middle  of  December,  1920,  the  "economist" 
of  one  of  the  large  New  York  banks  wrote  as  follows : 


406  i'KOHLKMS  IN   liTSINESS  FINANCE 

"The  position  of  most  large  businesses  is  exceed- 
ingly strong.  They  have  'ploughed  under'  a  very 
high  poroentage  of  the  abnormal  profits  of  the  past 
five  years.  .Vcklitions  to  corporate  surpluses  made  out 
of  profits  have  been  incredible.  On  the  face  of  the 
record  more  than  $16,000,000,000  was  added  to  cor- 
porate surpluses  in  the  United  States  from  1914  to  the 
end  of  1919,  and  this  has  been  on  the  basis  of  exceed- 
inglj' conservative  bookkeeping.  I^nincorporated  busi- 
nesses have  added  very  much  more,  but  the  figures 
cannot  be  given.  The  most  conservative  bookkeeping 
policies  have  been  followed;  plant  and  other  fixed 
assets  have  been  generally  estimated  at  pre-war  values, 
while  betterments,  and  even  additions  to  plant,  have 
often  been  charged  to  '  cost '  rather  than  entered  into 
capital  account." 

At  practically  the  same  time  the  president  of  a  large 
credit  organization  wrote  as  follows: 

"We  have  all  heard  too  much  about  failures  and 
rumors  of  failures. 

"These  general  rumors  of  business  troubles  that  have 
been  circulated  so  freely  in  the  market  this  season  are 
an  absolute  insult  to  the  intelligence  of  the  average 
business  man  in  a  normal  state  of  mind.  I  happen  to 
have  direct  access  to  information  on  all  concerns  in 
every  branch  of  industry,  selling  their  notes  to  banks 
through  note  brokers.  It  might  be  of  interest  to  you 
to  know  that  4,395  concerns  offered  their  paper  in  the 
open  market  this  year.  Out  of  this  number,  the  notes 
of  only  thirty-one  concerns  have  been  withdrawn  from 
the  market,  after  being  ofTered,  for  credit  reasons. 

"At  least  fourteen  of  these  have  had  no  trouble  at  all. 
Their  direct  banking  connections  were  found  sufficient 
to  take  care  of  their  requirements  and  their  paper  was 
withdrawn,  as  the  ratio  of  quick  assets  to  liabilities 
was  not  quite  up  to  the  open  market  standard. 

"In  all  probability,  twelve  or  thirteen  of  the  remain- 
ing names  will  continue  without   interruption,   while 


FINANCIAL  INVOLVEMENTS  407 

two  or  three  will  not  pay  in  full,  due  to  causes  that 
would  have  been  fatal  ultimately  under  any  circum- 
stances." 

In  connection  with  these  statements  the  following 
facts  should  be  borne  in  mind.  During  the  last  three 
months  of  the  year  1920  one  of  the  leading  mercantile 
agencies  reports  3,498  business  failures  with  liabilities 
aggregating  $128,544,334.  In  amount  of  liabilities  this 
was  far  in  excess  of  any  previous  year  in  our  history,  not 
excepting  the  last  quarter  of  1893,  when  the  record  of 
failures  was  4,824,  with  total  liabilities  of  $95,430,529. 
These  1920  failures  averaged  almost  twice  as  high  in 
individual  liabilities  as  in  any  previous  year  in  our 
financial  history.  During  the  first  six  months  of  1921 
the  same  agency  reports  9,035  failures,  with  aggregate 
habihties  of  $310,671,000.  In  amount  of  liabilities  tjie 
failures  for  the  first  half  of  1921  have  been  about  two- 
thirds  greater  than  during  a  similar  period  in  any  pre- 
ceding year.  In  actual  number,  for  this  period,  the  fail- 
ures of  1921  havebeen  exceeded  only  twice  in  our  history. 

In  addition  to  the  unprecedented  seriousness  of  fail- 
ures reported  during  these  nine  months,  there  have  been 
innumerable  extensions,  reorganizations  and  adjust- 
ments of  various  sorts,  which  have  saved  both  large  and 
small  businesses  from  going  bankrupt.  Some  of  these 
cases  are  commonly  known  in  the  financial  world,  such 
as  that  of  the  Goodyear  Company,  which  in  itself 
might  have  involved  an  excess  of  liabilities  over  assets 
amounting  to  at  least  $50,000,000,  had  it  been  allowed 
to  fail.  Innumerable  other  cases  are  being  quietly  han- 
dled by  the  banks  through  their  private  committees,  or 
by  mercantile  creditors  through  adjustments  of  various 
sorts.  In  fact,  the  writer  is  in  a  position  to  know  that 
the  actual  failures  during  the  period  mentioned  would 
probably  have  been  at  least  two  or  three  times  as  great 
as  those  reported,  had  it  not  been  for  the  unprecedented 
development  of  "financial  cooperation"  among  busi- 
ness concerns  and  the  banks  during  the  past  year. 

Statistics  available  by  the  end  of  June,  1921,  show 
that  about  seventy  of  our  large  and  well-known  and 


408  PHOBLlvMS  IN   Bl'SINKSS  FINANCP: 

supposedly  strong  l)usinoss  conipanios,  practically  all 
engaged  in  manufacturing,  with  an  outstanding  capital 
stock  of  about  $1,0()(),()()(),()(K),  passed  their  dividends 
on  common  or  preferred  stock,  or  both,  during  the  year 
1921,  subjecting  the  stockholders  to  a  loss  in  income  of 
about  $25, 000, 000.  A  large  numl:)er  of  other  concerns 
passed  their  divi'dends  during  th(^  last  (juarter  of  1920. 
In  addition  to  this  extensive  passing  of  dividends  by 
concerns  still  solvent,  a  very  large  number  of  com- 
panies have  either  reduced  their  dividends  or  paid 
them  in  stock  in  the  hope  that  future  earnings  may 
justify  this  policy. 

Finally,  it  should  be  noted  that  during  the  first  four 
months  of  1921  business  corporations  in  the  United 
States  issued  more  than  $1,000,000,000  in  new  securi- 
ties, about  two-thirds  of  which  was  said  to  be  for  the 
purpose  of  raising  "new  capital, "  and  the  remainder  for 
"refunding"  purposes.  However,  a  general  analysis  of 
the  situation  shows  that  by  far  the  greater  part  of  these 
issues  meant  "distress"  financing.  In  the  first  place, 
many  a  concern  was  forced  to  refund  outstanding  issues 
of  bonds  and  debentures  because  it  was  unable  to  main- 
tain the  ratio  of  current  assets  to  current  liabilities  or 
of  total  assets  to  total  liabilities,  called  for  by  the  bond 
indentures.  Hence  there  was  no  alternative  but  to  do 
new  financing  or  become  bankrupt.  In  the  second 
place,  most  of  the  "new  capital"  issues  were  either  in 
the  form  of  debenture  bonds,  with  very  stringent  sink- 
ing fund  or  other  protective  provisions,  or  in  the  form 
of  mortgage  bonds.  In  fact,  some  of  the  largest  and 
supposedly  best  managed  corporations  were  forced  to 
issue  first-mortgage  bonds  in  order  to  secure  "new 
capital"  to  protect  their  current  position,  frequently 
because  of  the  protective  provisions  of  an  earlier  pre- 
ferred stock  issue.  Most  of  the  so-called  "new" 
financing  was  merely  a  change  in  the  nature  of  the 
obligation,  from  banking  or  open  market  loans,  or  from 
notes  and  accounts  due  to  mercantile  creditors,  to 
mortgage  loans.  These  loans,  because  of  the  high  rates 
of  interest  at  which  thev  were  floated  and  because  of 


FINANCIAL  INVOLVEMENTS  409 

the  extremely  rigid  protective  features  introduced,  will 
in  many  instances  hamper  perfectly  solvent  concerns 
for  many  years. 

Questions 

1.  In  the  light  of  the  facts  nvhich  have  been  given, 
how  do  you  explain  the  quoted  statements  made  by 
men  who,  from  the  nature  of  their  positions,  are  sup- 
posed to  be  in  intimate  touch  with  the  actual  financial 
situation? 

2.  Does  the  fact  that  the  notes  of  only  a  negligible 
proportion  of  all  concerns  selling  their  paper  on  the 
open  market  in  1920  were  withdrawn  for  credit  reasons 
after  being  ofTered,  throw  any  light  on  the  actual  credit 
situation? 

3.  Does  the  fact  that  large  amounts  were  added  to 
corporate  surpluses  in  the  United  States  during  the 
war  period  argue  for  the  solvency  of  these  concerns? 
Why  or  why  not? 


Problem  206 
Will  Failures  Increase  as  Industry  Revives? 

In  the  spring  of  1921  the  following  statement  ap- 
peared in  the  financial  columns  of  the  New  York 
Evening  Post: 

"While  trade  is  dull  and  producers  and  dealers 
seem  content  to  drift  along  and  merely  take  care 
not  to  rock  the  boat,  many  leaky  business  craft 
can  manage  to  keep  afloat,  but  when  the  tide  turns 
and  it  becomes  necessary  to  quit  bailing  and  take 
to  the  oars  such  concerns  will  be  submerged. 
Many  firms  that  are  able  to  hold  together  in  a 


410  PROBLEMS  IN  BUSINESS  FINANCE 

slack  season  will  later  succumb  to  the  blows  of 
their  more  vigorous  competitors.  This  will  raise 
the  rate  of  business  mortality  for  a  short  time,  but 
this  should  not  be  regarded  as  a  bad  sign.  It 
means  the  elimination  of  the  unfit,  and  the  result- 
ing failures  are  the  cost  of  progress." 

Qiiestion 
Do  you  believe  that  the  above  reasoning  is  correct? 
Why? 


Problem  207 

How  Far  Should  Creditor  Cooperation    be  Carried 

IN  Critical  Periods? 

"Cooperation  among  creditors  has  unquestionably 
gone  a  long  w^ay  towards  ameliorating  failures;  and 
the  wisdom  of  a  liberal  poUcy  on  the  part  of  creditors 
at  present  is  generally  accepted.  The  suggestion  is 
ventured,  however,  that  an  attitude  of  leniency  is 
detrimental  to  the  mutual  interests  of  both  debtor 
and  creditor. 

''Some  of  those  who  are  now  asking  the  indulgence 
of  their  creditors  were  enormously  prosperous  during 
the  upswing  in  prices.  Instead  of  building  up  a  sink- 
ing fund  or  other  surplus,  they  made  additions  or 
alterations  to  plant,  or  overexpanded  their  business. 
The  result  has  been  that  the  outgoing  tide  finds  them 
well  up  on  the  beach.  They  do  not  accept  their  situ- 
tion  as  the  natural  sequence  of  their  own  improvidence 
and  of  an  era  of  abnormally  high  prices. 

"A  manufacturer  should  not  be  expected  to  perform 
a  banking  function  and  cannot  do  so  profitably,  even 


FINANCIAL  INVOLVEMENTS  411 

at  the  banker's  rate  of  interest.     Too  much  is  taken 
for  granted  by  some  embarrassed  debtors." 

(Reference:     Credit  Monthly,  June,  1921,  p.  32  ff.) 

Question 
1.  Should  you  consider  it  a  wise  policy  for  creditors 
to  invariably  press  those  concerns  whose  present 
financial  difficulties  are  the  result  of  war-time  over- 
expansion  or  failure  to  build  up  adequate  reserves,  and 
the  like  causes. 


Problem  208 

I   IFROVING    THE    CrEDIT     PoHITlON    OF    A    SmALL,     ClOSELY 

OwNED  Concern  by  Juggling  the  Securities 

An  old  Massachusetts  shoe  manufacturing  concern 
whose  stock  is  closely  held  by  a  few  individuals,  owing  to 
abnormal  conditions  prevailing  during  1920,  found 
its  surplus  (accumulated  during  several  years  of  suc- 
cessful operation)  completely  wiped  out,  and  a  large 
deficit  showing  on  the  asset  side  of  the  annual  state- 
ment. This  company  had  always  enjoyed  a  good  repu- 
tation and  was  considered  to  be  very  conservatively 
managed.  Its  paper  was  readily  sold  on  the  open 
market,  supported  by  well-balanced  figures  reflecting 
good  earnings.  The  unfavorable  financial  statement 
would  hereafter  prevent  the  company  from  placing  its 
paper  on  the  open  market,  although  it  was  perfectly 
solvent,  having  ample  assets  to  meet  its  liabilities. 

To  meet  the  situation,  the  few  stockholders  agreed 
to  cancel  $100,000  of  the  common  stock  which  they 
held.  This  enabled  the  company  to  wipe  out  its 
deficit  and  to  draw  up  a  new  statement  making  a 
more  attractive  showing. 

The  following  figures  show  approximately  the  con- 
dition of  the  company  before  and  after  stockholders 
had  donated   $100,000  of   the  common  stock,   which 


412  PROBLEMS  IN  BUSINESS  FINANCE 

was  canceled,  and  after  an  additional  issue  of  $25,000 
preferred  stock  exchanged  for  a  note  held  by  one  of 
the  officers  of  the  company  for  money  loaned  by  him 
to  the  corporation. 

Assets 

Before  Aftci- 

Cash $57,000       $57,000 

Receivables 86,000         86,000 

Inventory 395,000       395/)00 

$538,000     $538,000 

Plant 159,000  159,000 

Prepaid 20,000  20,000 

Patents 13,000  13,000 

Profit  and  loss  deficit 99,000       

$829,000  $730,000 

Liabilities 

Bills  payable $200,000  $200,000 

Accounts  payable 28,000  28,000 

228,000  228,000 

Due  to  endorser 50,000  25,000 

$278,000  $253,000 
Capital  Stock : 

Preferred 125,000  150,000 

Common 426,000  326,000 

Surplus 1,000 

$829,000  $730,000 

Questions 

1.  What  was  the  real  significance  of  this  action  on 
the  part  of  the  stockholders? 

2.  Should  you  now  expect  it  to  be  possible  for  this 
concern  to  secure  additional  credit? 

3.  Granting  that  most  of  the  bills  payable  are  com- 
mercial paper  loans,  and  since  these  loans  cannot  be 
renewed  at  maturity,  should  you  expect  this  company's 
bank  to  be  willing  to  lend  an  amount  sufficient  to  pay 
the  maturing  commercial  paper? 

4.  Does  this  problem  suggest  any  particular  advan- 
tages which  may  accrue  in  times  of  financial  stress  to 
the  closely  owned  business? 


FINANCIAL  INVOLVEMENTS  413 

Problkm  "iOJ) 

Improvinc;   the  Current  Position    in    a   Readjustment 

OF  Ownership 

The  A.  Company,  engaged  in  the  paper  and  pulj) 
business,  was  rapidly  expanding  and  always  suffered 
from  the  lack  of  working  capital.  Toward  the  end 
of  1915,  when  it  w^as  necessaiy  to  make  out  the  annual 
financial  statement,  the  company  found  that  its  cur- 
rent assets  were  not  enough  in  excess  of  its  current 
liabilities  to  enable  it  to  borrow  from  the  banks.  The 
ratio  was  about  1.25  to  1. 

It  should  further  be  explained  that  the  A.  Company 
owned  extensive  timber-lands,  owned  the  entire  capital 
stock  of  a  subsidiary,  the  B.  Company,  having  a  par 
value  of  $500,000,  and  one-half  of  the  capital  stock  of 
a  small  semi-defunct  company,  C.  The  other  half  of 
the  C.  Company  stock  w^as  owned  by  one  of  the  stock- 
holders of  the  A.  Company,  who  also  owned  a  consider- 
able amount  of  timber-land. 

The  A.  Company  had  outstanding  first-mortgage 
bonds  on  its  plant  and  timber-lands.  The  indenture 
of  these  bonds  provided  for  the  release  of  any  portion 
of  the  property  originally  covered  by  the  mortgage 
and  the  substitution  therefor  of  cash  or  of  other  prop- 
erty at  75  per  cent  of  its  cost  or  value,  w^hichever  was 
lower.  After  puzzling  over  the  situation  for  some 
time,  the  president  of  the  A.  Company  decided  to 
improve  his  current  position  in  the  following  manner : 

The  stockholder  w-ho  ow'ned  one-half  of  the  stock 
of  the  C  Company  was  persuaded  to  sell  a  large  amount 
of  his  timber-lands  to  the  C.  Company,  and  the  A. 
Company  agreed  also  to  sell  an  equal  amount  of  its 
timber-lands  to  the  C.  Company.  The  aggregate 
value  of  the  lands  thus  to  be  sold,  at  a  fair  valuation 
amounted  to  several  hundred  thousand  dollars.  Pay- 
ment for  the  lands  was  made  by  issuing  first-mortgage 
bonds  of  the  C.  Company  to  the  A.  Company  for  its 
portion  of  the  timber-lands,  while  the  stockholder 
agreed  to  take  second-mortgage  bonds,  plus  a  10  per 
cent  bonus  in  second-mortgage  bonds,  for  his  portion  of 


n4  PROBLEMS  IN  BUSINESS  FINANCE 

the  timber-lands  sold  to  the  C.  Company.  The  first- 
mortgage  bonds  were  readily  marketed  by  the  A.  Com- 
panj',  which  thus  secured  S500,000  in  cash  and  was 
able  to  show  a  very  creditable  current  position  at  the 
end  of  the  year.  In  order  to  comply  with  the  pro- 
visions of  its  mortgage  indenture,  the  A.  Company 
dissolved  the  B.  Company,  whose  stock  it  owned,  and 
substituted  the  physical  property  of  the  erstwhile  B. 
Company  for  the  timber-lands  sold. 

Questions 

1.  Is  this  method  of  raising  working  capital  to  be 
approved  from  the  point  of  view  of  the  lending  banks? 

2.  From    the   point   of   view  of  the  A.   Company, 
examine  the  strength  or  weakncvss  of  the  steps  taken. 


Problem  210 

The   Part  which   Protective  Provisions  Surrounding 

A  Security  Issue  May  Play  in  a  Company's 

Solvency 

The  ....  Company  has  sufficient  inventories  on 
hand  to  take  care  of  its  normal  manufacturing  pro- 
gram for  six  months.  However,  sales  have  almost 
wholly  stopped  and  it  is  probable  that  business  will 
not  pick  up  again  for  at  least  three  months.  If  the 
company  should  shut  down  completely,  its  overhead 
expenses  would  still  be  $250,000  per  month  and  there 
is  very  little  cash  in  the  treasury.  The  direct  labor 
expenses  when  the  plant  is  running  at  normal  capacity 
would  be  $75,000  per  month. 

The  net  quick  assets  of  this  company  early  in  1921 
were  $1,600,000.  The  current  liabilities  amounted  to 
$500,000. 

The  company  has  outstanding  $1,000,000  in  de- 
benture  bonds.     The   bond   indenture   provides   that 


FINANCIAL  INVOLVEMENTS  415 

the  company  shall  iiiaiiitain  net  quick  assets  equal 
to  at  least  150  per  cent  of  the  outstanding  debentures, 
and  that  failure  to  maintain  this  ratio  shall  constitute 
a  default,  in  which  case  the  bonds  shall  become  due  and 
payable. 

Questions 

1.  Should  this  company  close  down  the  plant  or 
continue  to  operate  at  normal  capacity? 

2.  Do  you  see  any  method  of  avoiding  a  receiver- 
ship without  new  financing? 

3.  Assuming  that  the  company  has  outstanding 
$1,000,000  in  preferred  stock  instead  of  debenture 
bonds,  but  with  the  same  security  provisions,  would  its 
present  financial  difficulties  be  any  less  serious?     Why? 


Problem  '-2 11 

Avoiding    a    Serioits    Financial    Dilemma    Through    a 

Debenture  Issue 

The  L.  Company  is  engaged  in  making  several 
types  of  machine  tools,  together  with  accessories. 
About  50  per  cent  of  the  business  in  volume  is  normally 
carried  by  the  accessories,  while  the  remainder  is 
divided  between  two  types  of  machines  for  which 
there  is  an  alternate  demand.  While  the  volume  is 
about  equally  divided  between  accessories  and  the 
machines,  about  80  per  cent  of  the  profits  are  ordinarily 
made  on  the  accessories,  which  normally  must  be 
bought  by  those  who  are  using  the  machines.  Before 
1914  the  business  of  this  company  was  relatively  un- 
profitable. In  this  year,  however,  the  management 
was  changed;  and  for  the  next  four  or  five  years  the 
concern  was  an  excellent  money-maker. 


416  PROBLEMS  IN  BUSINESS  FINANCE 

In  1919,  acting  on  the  advice  of  experts  in  the  field, 
the  management  decided  to  expand  its  plant  with  a  view 
to  providing  sufficient  room  for  manufacturing  in 
larger  quantities,  as  unit  costs  could  thus  be  con- 
siderably decreased  and  as  it  would  then  be  possible 
to  make  more  speedy  deliveries.  Orders  were  at  the 
time  booked  far  in  advance,  and  it  was  a  real  source 
of  annoyance  to  customers  that  they  had  to  wait  so 
long  to  have  their  orders  filled.  The  plant  was  ac- 
cordingl}'  increased  in  size  until  the  balance  sheet 
item  for  real  estate  was  doubled. 

When  the  depression  in  this  line  of  business  became 
marked  about  the  middle  of  1920,  the  new  plant  was 
erected  but  was  not  yet  equipped  with  machinery 
and  fixtures.  Fortunately,  also,  no  commitments 
had  been  made  for  the  purchase  of  eqviipment.  The 
business  depression  found  this  company  in  July,  1920, 
with  an  inventory  larger  than  normal  in  quantity,  and 
naturally  from  two  to  three  times  larger  than  normal 
in  vakie.  In  August  there  was  a  sudden  change 
in  demand  for  the  machines  being  made,  which  left 
the  concern  with  a  very  badly  balanced  inventory. 
The  financial  situation  confronted  by  the  concern  may 
be  summed  up  as  follows: 

The  business  was  capitalized  at  $400,000  preferred 
stock  (cumulative  at  6  per  cent),  and  $350,000  com- 
mon stock.  Both  the  preferred  stock  and  common 
stock  was  held  largely  by  the  same  parties,  about 
thirty  stockholders  constituting  from  15  to  20  per 
cent  of  the  entire  number  of  stockholders  and  own- 
ing a  majority  of  the  stock.  There  was  no  mortgage 
on  the  plant,  the  expansion  having  been  financed 
through  personal  loans  of  several  well-to-do  stock- 
holders and  some  bank  loans.  The  volume  of  sales 
of  the  company  reached  a  peak  of  more  than  $600,- 
000  in  1919  and  shrank  very  rapidly  during  the  year 
1920,  until  during  the  last  quarter  there  was  an  ac- 
tual loss  in  operation,  after  interest  on  current  loans 
was  paid,  but  without  allowing  for  depreciation,  and 


FINANCIAL  INVOLVEMENTS  417 

other  charges,  of  $30,000.  Preferred  dividends  were 
passed  at  this  time. 

In  December,  1920,  in  order  to  get  the  jump  on  its 
competitors,  who  it  was  thought  would  probably 
reduce  their  price  from  12  per  cent  to  15  per  cent,  a 
price  reduction  of  33^3  per  cent  was  made  on  the  ma- 
chines manufactured.  No  reduction,  however,  was 
made  on  the  appliances,  which  were  almost  invari- 
ably sold  along  with  the  machines  or  to  those  who 
were  already  using  the  same.  This  reduction,  of  course, 
tended  to  hasten  the  turnover  of  the  company's  in- 
ventory, even  though  at   a  loss. 

It  should  further  be  stated  that  the  company  had 
had  very  few  cancelations  of  orders  during  this  period, 
because  of  the  fact  that  it  sold  principally  to  18  or  20 
dealers  who  were  secured  by  contract  against  a  drop 
in  the  market,  pro\'ision  having  been  made  for  re- 
imbursing the  customer  in  case  of  price  reductions. 
Accompanying  this  guarantee  against  loss  from  price 
reduction  were  stipulations  as  follows:  (a)  a  dealer 
would  have  the  exclusive  right  to  sell  in  his  own  ter- 
ritory, (6)  he  should  not  handle  competing  goods,  and 
(c)  he  should  carry  a  complete  line  of  accessories. 

The  current  ratio  of  this  company,  which  in  January, 
1920,  had  been  more  than  2  to  1,  had  been  reduced 
to  a  little  more  than  1  to  1  b}'-  the  early  part  of  1621. 
The  current  liabiUties  at  this  time  were  composed  as 
follows :  52  per  cent  due  to  home  banks,  20  per  cent  due 
on  note  to  large  stockholders,  and  the  balance  of  28 
per  cent  was  covered  by  open  accounts  in  the  trade, 
accrual  items,  and  the  like.  The  gross  business  of  the 
company  had  dropped  from  $600,000  in  1919  to  an 
estimated  $60,000  in  the  first  half  of  1921.  Further, 
there  was  an  operating  loss  of  $33,000  during  the  first 
quarter  of  1921,  and  a  probable  loss  of  $3,000  during 
the  second  quarter. 

The  problem  which  confronted  the  management 
in  the  spring  of  1921,  therefore,  was  apparently  either 
bankruptcy  proceedings  or  some  kind  of  financing 
which  would  improve  the  current  position  and  enable 


« 
418  PROBLKMS  IN  BUSINESS  FINANCE 

them  to  pay  off  their  trade  creditors  and  part  of  their 
bank  loans  which  had  been  several  times  extended. 
The  following  plan  was  worked  out : 

The  company  offoretl  to  its  preferred  and  common 
stockholders  $300,1)00  in  10-year,  8  per  cent  debentures 
to  be  subscribed  to  in  cash  at  93 ^  or  to  be  taken  at 
par,  75  per  cent  in  cash  and  25  per  cent  in  preferred 
stock.  (The  preferred  stock  was  not  listed  on  any 
exchange  and  was  normally  very  inactive,  though 
there  had  been  a  few  recent  sales  at  about  45). 

The  results  of  this  offer  to  the  stockholders  were  as 
follows:  About  $95,000  of  debentures  were  sold  to 
about  30  of  the  heavier  stockholders,  two  of  whom 
did  not  own  any  preferred  stock.  Only  three  of  these 
stockholders  paid  for  their  bonds  in  preferred  stock 
in  accordance  with  the  arrangement  made.  The 
others  paid  cash  at  the  rate  of  $93.50  per  $100  in 
debentures. 

This  financing  resulted  in  an  improvement  of  the 
current  position  by  about  $80,000,  iDrought  about  by 
the  exchange  of  the  stockholders'  notes  for  debentures 
to  the  extent  of  $50,000,  and  an  increase  in  cash  by 
about  $30,000.  In  all,  about  $10,000  in  preferred 
stock  was  retired. 

Questions 

1.  Was  this  company  justified  in  1919  in  expanding 
its  plant  for  the  reasons  given? 

2.  Was  it  a  wise  policy  for  this  company  to  have 
guaranteed  its  dealers  against  loss,  even  though  by 
so  doing  cancelations  were  generally  avoided? 

3.  Do  you  consider  that  the  company  adopted 
the  best  method  of  getting  out  of  its  present  financial 
difficulties? 

4.  Can  you  explain  why  only  three  of  the  stock- 
holders who  subscribed  to  the  debenture  issue  ex- 
changed their  preferred  stock  for  bonds  in  the  pro- 
portion allowed? 


FINANCIAL  INVOLVEMENTS  410 

Problem  "21 '2 
Possible  CoNsKtiUENCKs  of  Heavy  Commitments 

When  prices  were  tending  rapidly  downward,  when 
purchases  were  falUng  off,  and  supposedly  good  con- 
tracts were  being  canceled,  the  A.  B.  Company,  a 
cotton-manufacturing  concern  of  high  repute,  found 
itself  in  the  following  financial  condition  so  far  as  its 
current  position  was  concerned: 

Quick  Assets 

Cash I  500,000 

Accounts  receivable 950,000 

Bills  receivable  (from  customers).  100,000 
Merchandise  inventory: 

Raw  material ' 1,500,000 

Semi-finished  goods 900,000 

Finished  goods 2,550,000 

$6,500,000 

Quick  Liabilities 

Accounts  payable $      275,000 

Notes  payable 2,825,000 

Reserve  for  taxes 140,000 

I  3,240;000 

This  statement  indicates  a  current  position  of  more 
than  2  to  1 ,  which  in  a  good  cotton  mill  is  usually  con- 
sidered highly  satisfactory.  The  company  had  been 
making  money  during  the  first  half  of  the  year  1920, 
and  as  indicated  by  the  reserve  for  taxes  has  been 
highly  prosperous.  The  surplus  and  undivided  profits 
amount  to  $250,000.  As  a  resul*^  of  the  caution  of 
the  management,  a  reserve  of  $300,000  has  been  set 
up  against  possible  depreciation  in  merchandise  in- 
ventory. The  capital,  all  paid  in,  amounts  to 
$3,000,000. 

Upon  investigation,  it  was  found  that  this  company 
had  earlier  made  commitments  to  purchase  cotton 
at  the  high  price  then  prevailing.  This  would  call  for 
the  payment  of  about  $5,000,000.  The  business  of 
this  concern  practically  closed  down  in  the  autumn 
of  1920,  while  the  price  of  cotton  inside  of  three  months 


420  PHOBLKMS  IN  BUSINESS  FINANCE 

dropped  about  50  per  cent.  Even  though  there 
were  no  other  increase  in  liabihties,  the  company 
would  be  subject  to  a  shrinkage  of  about  50  per  cent 
on  the  merchandise  inventory  which  it  had  on  hand 
in  August,  1920,  and  of  fully  50  per  cent  on  the  new 
cotton  which  it  was  under  contract  to  purchase.  In 
other  words,  if  the  mill  should  continue  to  take  in 
raw  cotton  according  to  its  agreement,  it  would  b}- 
the  end  of  the  year  increase  its  quick  liabilities  by 
about  $5,000,000,  while  its  quick  assets,  on  account 
of  the  shrinkage  on  the  merchandise  on  hand,  would 
have  increased  very  little,  if  at  all. 

Questions 

1.  If  you  were  the  president  of  this  company, 
would  you  have  canceled  your  contracts  when  you 
found  the  price  of  cotton  dropping  so  rapidly?  If  not, 
what  would  you  have  done? 

2.  As  the  banker  of  this  concern,  what,  advice  would 
you  give? 


Problem  "ilS 
Threatened  Failure  Due  to  "OvERBUYiNo" 

The  .  .  .  Leather  Company  had  been  conserva- 
tively managed  over  a  period  of  years.  It  had  the 
highest  credit  rating  among  the  banks  and  the  trade. 
Its  stock  was  largely  held  by  a  few  wealthy  men, 
though  there  was  a  sprinkling  of  small  stockholders. 
Acting  on  advices  which  had  been  given  by  people  in 
the  trade  and  on  various  reports  by  the  United  States 
Department  of  Commerce,  the  company  invested  very 
heavil}'  in  inventories  in  1919,  placing  orders  for  a 
large  quantity  of  hides  from  the  Argentine.  The 
deliveries  came  in  gradually  after  several  months. 


FINANCIAL  INVOLVEMENTS  421 

In  the  meantime,  on  account  of  the  credit  conditions 
prevaiHng  and  the  high  prices,  the  sale  of  shoes  was 
practically  stopped.  The  manufacturers  who  had  been 
placing  orders  with  the  leather  company  curtailed 
or  canceled  their  purchases,  so  that  in  less  than  a  year 
the  .  .  .  Company  ^^•as  left  high  and  dry  with  practi- 
cally no  working  capital  but  its  inventory,  which  earlier 
in  the  year  had  been  valued  at  about  $8,000,000. 
Late  in  1920,  however,  due  to  the  drop  in  the  price  of 
leather,  the  inventory  was  cut  in  half  and  the  company 
was  forced  to  take  a  loss  of  about  $4,000,000.  This 
loss  wiped  out  the  accumulated  surplus  of  years,  thus 
reducing  the  current  ratio  to  little  more  than  1  to  1. 
Notes  to  the  banks  for  large  amounts  were  coming 
due,  and  it  seemed  that  the  concern  would  be  thrown 
into  bankruptcy. 

It  was  apparent  that  now  when  hides  had  reached 
practically  the  lowest  price  in  history,  the  company 
might  be  able  to  recoup  some  of  its  earlier  losses  by 
buying  at  the  current  market  and  holding  for  higher 
prices.  Not  only  would  this  ha\'e  j^roved  a  safe  specu- 
lation, but  it  probably  would  have  been  possible  in  a 
year  or  two  to  effect  a  great  saving  on  the  cost  of 
production  by  purchasing  surplus  hides  now.  Under 
the  circumstances,  however,  this  policy  seemed  wholly 
impossible,  as  no  further  credit  could  be  secured. 

1.  What,  under  the  circumstances,  can  this  con- 
cern do  in  order  to  regain  a  solvent  position? 


422  PROBLEMS  IN  BUSINESS  FINANCE 

Pkobi.kn(  "2} a 

IloW     FaK     SlIOlM)    TIIK    StOCKHOLDKUS    (io    IN    TllKIH 

Attiomi'ts  to  Sank  a  Comi'aw  khom  pAiLruK? 

The  National  Conduit  and  Cable  Company  was  or- 
ganized in  1917  out  of  previously  existing  companies 
which  had  api^arently  been  successful.  Its  capitaliza- 
tion consisted  of  250,000  shares  of  no  par  value  common 
stock,  marketed  at  $35  per  share,  and  $5,000,000  first- 
mortgage,  sinking-fund,  ten-year,  6  per  cent  bonds. 
The  bond  indenture  provided  that  an  annual  payment 
of  $125,000  should  be  made  to  the  sinking  fund  for  re- 
tirement of  bonds,  either  by  purchase  in  the  open 
market  or  by  calling  by  lot  at  a  price  which  after  April 
1,  1919,  should  not  exceed  $105  and  interest.  The 
indenture  also  provided  that  the  company  "shall  at 
all  times  maintain  net  quick  assets  at  a  figure  in  ex- 
cess of  the  aggregate  bonded  indebtedness." 

Almost  from  the  beginning  this  company  failed  to 
make  money^  though  its  various  balance  sheets  showed 
assets  ranging  from  fifteen  to  twenty  million  dollars. 
Its  net  sales  for  the  year  1920  were  $13,733,903,  as 
compared  with  sales  of  $10,557,836  in  1919.  On  April 
7,  1921,  the  following  notice  was  sent  to  the  bond- 
holders by  a  Protective  Committee  representing  the 
principal  bondholders: 

The  statement  of  the  financial  condition  of  the  Company 
as  of  December  31,  1920,  which  has  been  filed  with  the 
Trustee  pursuant  to  the  terms  of  the  mortgage,  shows  that 
the  Company  is  not  comphdng  with  its  covenant  to  maintain 
net  quick  assets,  as  defined  in  the  mortgage,  at  an  amount 
in  excess  of  tlie  outstanding  Ijonds,  which  at  that  date 
amounted  to  $4,438,500  face  value.  The  deficiency  was  in 
excess  of  $900,000  according  to  the  statement  and  has  since 
increased. 

We  are  advised  that  the  Trustee  has  served  written  notice 
of  this  default  on  the  Company  and  that  the  period  of  grace 
will  expire  on  or  about  April  19th,  after  which  date  remedies 
undei-  the  mortgage  may  be  invoked  against  the  Company. 

The  unfavorable  results  of  the  Company's  past  operations 
indicates  that  the  existing  deficiency  in  net  quick  assets, 
which  already  endangers  the  bondholders,  is  more  likely 
still  further  to  increase  than  to  diminish.     In  these  circum- 


FINANCIAL  INVOLVEMENTS  423 

stances,  and  in  view  of  the  fact  that  the  Uciuidation  of  the 
Company  may  he  advisable,  it  is  important  that  the  hohlers 
of  the  First  Mortgage,  6  Per  Cent,  Ten-Year,  Sinkinj:  Fund 
(lold  Bonds  unite  for  the  protection  of  their  interests.  The 
undersigned,  representing  a  large  amount  of  the  bonds,  have 
agreed  to  act  as  a  Committee  for  that  purpose. 

Sherman  &  Sterling.  Charles  E.  Mitchell, 

Counsel.  President, 

The  National  City  Co. 
Sherman  Allen,  James  H.  Perkins, 

Secretary,  Montgomery  &  Co. 

No.  55  Wall  Street  William  0.  Gay, 

New  York  City.  W.  O.  Gay  &  Co. 

Committee. 

The  National  City  Bank  of  New  York,  Depositary, 
No.  55  ^^'all  Street,  New  York  City. 

About  the  same  time  a  committee  of  the  stock- 
holders was  endeavoring,  if  possible,  to  save  the  com- 
pany from  bankruptcy.  They  employed  an  engineer- 
ing firm  to  look  into  the  company's  finances  and 
prospects.  This  firm  estimated  that  if  $1,500,000  new 
money  w^ere  put  into  the  concern,  it  could,  after  a  period 
of  six  months,  show  net  earnings  of  $500,000  a  year, 
which  would  be  sufficient  to  pay  their  interest  and  leave 
about  $1  per  share  for  the  stock. 

It  was  admitted  by  this  committee  that  the  National 
Conduit  and  Cable  Company  had  lost  $1,063,438  in 
1919  and  $1,222,752  in  1920.  In  fact,  the  balance 
sheet  as  of  December  31, 1920,  showed  a  profit  and  loss 
deficit,  accumulated  since  1917,  of  $3,178,869. 

In  the  face  of  this  situation  the  Stockholders'  Pro- 
tective Committee  recommended  that  the  stockholders 
put  up  the  extra  money  indicated,  amounting  to  about 
$6  per  share,  on  condition  that  the  bondholders  accept 
less  drastic  provisions  regarding  the  security  of  their 
bonds  than  now  existed.  Various  other  methods  were 
also  suggested  for  solving  the  difficulty  through  re- 
organization of  some  sort  which  would  improve  the  cur- 
rent position.  One  suggestion  was  an  8  per  cent  cumu- 
lative preferred  stock  issue.  Another  step  talked  of 
was  the  issue  of  a  new  mortgage  carrying  a  higher  rate 


424  PROBLEMS  IN  BUSINESS  FINANCE 

of  interest,  the  proceeds  of  which  might  be  used  to 
retire  the  bonds  already  outstanding.  At  this  time, 
however,  it  was  found  that  these  bonds  had  been  selHng 
recently  on  the  open  market  at  60  and  that  the  common 
stock,  which  is  listed  on  the  New  York  Exchange,  was 
quoted  at  from  \]/^\o  2. 

Questions 

1.  What  light,  if  any,  does  this  problem  throw  on 
the  possible  financial  results  of  combinations? 

2.  As  a  bondholder,  what  course  would  you  follow? 

3.  Granting  that  the  bondholders  do  not  force  liqui- 
dation, should  you  advise  the  stockholders  to  put  up 
the  additional  amount  of  money  supposedly  needed  to 
save  the  situation? 

4.  Of  the  other  steps  suggested,  which  would  seem 
to  you  to  be  most  feasible? 

5.  What  do  you  expect  the  financial  future  of  this 
company  to  be? 


Problem  '21.5 

Banker  Control  and  the  Credit  Problem  in  Times  or 

Financial  Stress 

The  Oak  Company  is  engaged  in  the  tanning  and 
handling  of  a  kind  of  leather  which  ordinarily  has  a 
very  good  market.  The  affairs  of  the  concern  have 
been  very  closely  kept,  inasmuch  as  the  chief  officers 
are  important  l)ankers  who  are  largely  using  their  own 
bank  for  financing  the  business.  Recently,  however 
(April  1,  1921),  on  account  of  rumors  which  have  been 
afloat,  some  of  the  banks  holding  the  com  mercial  paper 


FINANCIAL  INVOLVEMENTS  425 

of  this  company,  as  well  as  some  which  had  redis- 
counted  their  commercial  loans,  began  to  make  in- 
quiries into  the  actual  financial  condition  of  the 
company.  Heretofore  the  excellent  reputation  of  the 
bankers  interested  in  the  concern  had  been  sufficient 
to  enable  the  company  to  sell  its  paper  on  the  open 
market  and  to  enjoy  the  rediscount  market  without  any 
question. 

After  much  difficulty,  the  following  statement  of 
condition  as  of  Februarj^  1,  1921,  was  secured: 

Statement  of  Oak  Company 
Fobmary  1,  1921 

Assets 

Cash .143,500 

Accounts  receivable 385,000 

Merchandise 3,512,000 

Land  and  buildings 613,500 

Investments 93,500 

Prepaid  items 40,000 

$4,687,500 

Liabilities 
Notes  payable  for  borrowed  money 

(including  the  open  market) .  .  .   $2,364,000 
Accounts  payable  (including  trade 

acceptances) 155,500 

Reserved  for  taxes,  wages 47,500 

Dividends ^ 18,000 

Capital : 

Preferred  stock 1,250,000 

Common  stock 288,500 

Surplus 564,000 

$4,687,500 

The  outside  bankers  holding  the  paper  of  this  com- 
pany were  considerably  alarmed  at  the  situation  pre- 
sented. The  officers  of  the  bank  which  was  lending 
most  heavily  on  straight  commercial  loans  were  then 
appealed  to  for  information  as  to  how  the  affairs 
actually  were  standing.  Howevei',  the  replies  were 
rather  elusive,  and  about  all  that  could  be  learned  was 
that  the  company  had  in  three  months '  time  reduced 
its  indebtedness  to  this  bank  by  $400,000,  though  it 


426  PROBLEMS  IN  BUSINESS  FINANCE 

was  admitted  that  practically  no  business  was  being 
done.  It  was  further  stated  that  there  was  normally, 
and  would  bo  ultimately,  a  very  good  demand  for  their 
product  and  that  the  company  would  be  one  of  the  very 
first  to  profit  when  business  conditions  were  changed 
for  the  better.  The  opinion  was  given  that  unques- 
tionably the  company  was,  considering  business  con- 
ditions, in  a  very  satisfactory  condition  and  would 
soon  be  in  a  really  strong  position. 

On  the  same  da}'  that  this  information  was  recei\'ed 
from  the  prominent  banker  who  was  financially  in- 
terested in  the  concern,  word  was  also  received  from 
a  former  minor  officer  of  the  company,  whose  record 
with  them  seems  to  have  been  unquestioned  and  whose 
reputation  with  his  present  employers  is  of  the  best, 
to  the  effect  that  he  knew  personally  that  the  larger 
part  of  the  inventory  of  this  company  was  unsalable, 
some  of  it  having  been  ruined  in  handling,  and  some 
having  seriously  depreciated  as  a  result  of  long  storage. 

The  problem  now  confronting  the  outside  banks  is 
whether  they  should  consent  to  renew  their  loans  and 
rediscounts,  as  the  company  is  obviously  not  in  a 
position  to  ''clean  up";  and  the  problem  confronting 
the  banker  officers  of  the  concern  is,  what  steps  they 
shall  take  if  the  outside  banks  demand  their  money. 

Questions 

1 .  From  an  analysis  of  the  statement  presented  what 
conclusions  do  you  draw  regarding  the  character  and 
capacity  of  the  management  of  this  concern? 

2.  From  the  problem  as  presented,  what  conclu- 
sions, if  any,  do  you  draw  regarding  the  advantages  or 
disadvantages  of  a  good-sized  industrial  company's 
having  for  its  officers  important  officials  of  banks, 

(a)  From  the  point  of  view  of  the  industry  itself? 

(b)  From  the  point  of  view  of  the  banking  community? 

3.  What  do  you  expect  the  financial  future  of  this 
concern  to  be? 


FINANCIAL  INVOLVEMENTS  427 

Pi{()BLi:,M  '■21(5 

DiFFicn/riEs  Arising  TuRoucai  ATTi:\iPTiNfi  to  Financk 

AN  Expansion  by  Means  of  Ci  hkent 

Loans  and  Dealer  Credit 

A  Chicago  confectionery  manufacturing  concern, 
with  prospects  of  excellent  business  ahead,  made  ex- 
tensive additions  to  its  plant  which  greatly  increased 
its  current  indebtedness.  Owing  to  the  general  slump 
in  this  particular  line  of  business,  they  were  caught 
with  a  large  amount  of  merchandise  which  they  could 
not  move,  and  were  pressed  by  their  creditors  who  had 
furnished  the  material,  labor  and  equipment  for  the 
plant  extension.  In  this  position  the  company  was 
unable  to  get  further  bank  credit,  unless  the  present 
large  creditors  w-ould  be  willing  to  wait  for  their  money 
and  w^ould  give  some  assurance  that  they  would  not 
push  their  claims  until  a  definite  future  date. 

The  company  then  issued  a  sufficient  amount  of 
three-year,  7  per  cent  notes,  secured  by  a  first  mortgage 
on  its  land,  buildings  and  equipment,  which  were 
accepted  b}^  some  of  the  large  creditors  in  settlement 
of  their  claims.  Others  were  sold  to  furnish  cash  to 
enable  the  company  to  continue  through  the  depres- 
sion prevailing  in  this  particular  industry. 

The  following  figures  show  the  condition  of  the 
company  before  and  after  placing  a  $245,000  mortgage 
on  its  plant  and  fixtures,  against  which  were  issued 
three-year  notes,  of  which  a  large  part  were  given  to 
creditors  to  settle  their  claims  on  account  of  new  con- 
struction and  equipment  furnished. 

Assets 

Before  After 

Cash iii;i2,000  $8,000 

Receivables (57,000  125,000 

Inventory 153,000  169,000 

$232,000  $302^000 

Plant $592,000  $017,000 

Prepaid 49,000  24,000 

Capitalization  expense 67,000 

"$8737)00  $1,010,000 


428  PROBLEMS  IN  BUSINESS  FINANCE 

Liabilities 

Bills  pavahlo $25,000  SI 5,000 

Acc-ouiits  payable 224,000  11 5,000 

Accruod 34,000  _     22,000 

S283,000         $152,000 
Mortgage  notes 245,000 

$283,000  $397,000 
Capital  Stock: 

Preferred $443,000  $443,000 

Common 44,000  44,000 

Surplus 103,000  126,000 

$873,000  $1,010,000 

Questions 

1.  Indicate  the  fundamental  mistakes  made  by  this 
company  before  they  got  into  financial  difficulties. 

2.  What  is  your  opinion  of  the  method  taken  by 
this  concern  to  secure  temporary  relief,  and  what 
do  you  expect  the  outcome  to  be? 

3.  As  a  mercantile  creditor,  would  you  have  been 
willing  to  have  your  claims  settled  in  the  way  indicated? 

4.  Should  a  commercial  bank  ever  knowingly  make 
loans  for  fixed  capital  purposes? 


Problem  'U7 

Shall  a  Strong  Concern  Which  is  the  \'ictim  of  Hard 

Luck  be  Allowed  to  P\\il? 

The  Peerless  Confectionery  Company  of  Philadelphia 
had  outstanding  $340,000  in  preferred  stock  and 
$100,000  in  common  stock.  A  considerable  amount 
of  the  stock  was  still  owned  by  the  members  of  the 
private  banking  house  which  had  originally  financed 
the  concern.  No  new  financing  had  been  done  since 
the  outbreak  of  the  war.  The  business  of  this  com- 
pany was  very  well  managed  and  had  proved  to  be 


FINANCIAL  INVOLVEMENTS  429 

extremely  profitable  during  the  war.  In  19 lU,  net 
earnings  before  the  payment  of  taxes  amounted  to 
more  than  $800,000.  After  the  payment  of  $250,000 
in  excess  profits  taxes,  net  earnings  available  for  divi- 
dends amounted  to  more  than  $550,000.  The  earn- 
ings of  this  year  were  typical  of  the  war-time  earnings. 
Some  of  the  common  stock  was  sold  early  in  1920 
at  $1,200  per  share. 

As  a  result  of  the  incon\'enience  and  delay  which 
had  been  caused  largely  by  the  conservative  purchas- 
ing policy  of  this  company  during  the  preceding  year, 
as  well  as  because  of  the  great  difficulties  encountered 
in  securing  needed  commodities,  the  company  in  1920 
began  to  buy  more  raw  materials,  so  that  it  would  not 
have  to  turn  away  or  delay  its  orders.  Finding  that 
they  could  buy  more  cheaply  by  taking  a  whole  cargo, 
they  placed  a  large  order  for  cocoa  beans.  They  also 
purchased  sugar  and  peanuts  in  considerable  quan- 
tities. In  addition  they  committed  themselves  for 
these  large  purchases  at  war-time  prices. 

The  company's  affairs  became  seriously  involved 
because  of  the  strike  of  shipping  employees  early  in 
the  year,  which  resulted  in  holding  up  for  many  weeks 
some  of  the  shipments  which  the}^  were  to  receive. 
Consequently,  an  attempt  was  made  to  secure  addi- 
tional cocoa  beans  from  Europe  and  a  large  cargo 
was  contracted  for  in  Spain.  Immediately  after- 
wards, however,  there  was  a  serious  strike  and  a 
"revolution"  in  Spain  which  delayed  shipment  for 
several  weeks,  so  that  the  company  was  forced  to  pick 
up  some  large  shipments  elsewhere  in  order  to  carry 
on  its  business. 

The  outcome  was  that  late  in  1920  the  company  be- 
came stocked  up  with  an  unusually  large  amount  of  in- 
ventory, at  a  time  when  pi-ices  were  rapidly  drop])ing 
and  business  was  speedily  declining.  The  result  of 
the  year's  operations  indicated  a  loss  due  to  cancela- 
tions, inventory  shrinkage,  and  the  like,  of  $1,400,000. 
Cocoa  beans  which  were  bought  at  19^  2  cents  per 
pound  in  1920  could  in  the  early  part  of  1921  he  pur- 


430  PROBLEMS  IN  BUSINESS  FINANCE 

chased  for  a  little  more  than  5  cents;  peanuts  which 
had  been  bought  in  large  quantities  at  14  to  15  cents 
per  pound  could  now  be  bought  at  about  3  cents, 
and  sugar  laid  in  at  22  V  2  cents  per  pound  could  be 
purchased  for  5  or  6  cents  per  pound. 

This  concern's  current  liabilities  early  in  1921 
amounted  to  more  than  $2,000,000,  the  major  part 
of  which  was  owed  to  the  banks  either  on  straight  com- 
mercial loans  or  on  banker's  acceptances  covering  the 
import  of  goods,  and  the  company  was  at  this  time 
practically  insolvent. 

Questions 
1.  Do  you  see  any  means  whereby  this  concern  can 
avoid  bankruptcy?     If  so,  what  steps  should  be  taken? 


Problem  !218 

Attempting  to  Save  a  Concern  Engaged  in  the 

Cuban  Trade  by  a  Further  Extension 

OF  Bank  Loans 

The  Y.  Company  is  a  partnership  in  Baltimore 
engaged  in  the  shoe  jobbing  business.  It  is,  however, 
practically  a  "one-man  concern,"  having  in  1919  a 
net  worth  of  about  $300,000.  This  concern  did 
business  principally  with  foreign  countries  and  was 
particularly  interested  in  the  Cuban  export  trade. 
Early  in  1920  business  was  booming  in  Cuba  and  every- 
one was  spending  liberally.  In  fact,  most  of  the  shoes 
were  being  shipped  to  Cuba  at  this  time,  and  the  banks 
apparently  considered  the  credit  of  a  concern  thus 
engaged  in  the  export  trade  particularly  good.  The 
company  accordingly  had  lines  of  credit  with  three 
banks  in  the  city  to  the  extent  of  about  $100,000  each, 
most  of  which  were  being  used  to  the  limit.  After 
the  "sugar  crisis"  came  in  the  autumn  of  1920,  the 


FINANCIAL  INVOLVEMENTS  431 

concern  found  itself  at  the  end  of  the  year  in  the  follow- 
ing condition : 

Assets 

Inventory $190,000 

Receivables 400,000 

Cash. 10,000 

Miscellaneous 10,000 

$610,000 

Liabilities 

Notes  payable  to  banks $300,000 

Accounts  payable 125,000 

Trade  acceptances  and  miscellaneous 

payables 25,000 

Partners'  capital 160,000 

$610,000 

Of  the  receivables,  approximately  $300,000  was  due 
from  customers  in  Cuba.  These  receivables  were  for 
the  time  being  practically  worthless.  It  was  perfectly 
apparent  that  only  a  small  proportion  of  them  would 
be  paid.  Further,  in  the  course  of  a  few  months,  fully 
one-third  of  the  receivables  turned  back  into  mer- 
chandise as  the  company  managed  to  get  back  some 
of  the  goods  already  sold  to  customers  who  now  were 
bankrupt . 

During  the  first  five  months  of  1921  about  $50,000 
was  collected  from  Cuba.  This  was  used  to  cut  down 
the  bank  loans.  Also,  the  company  opened  up  several 
retail  stores  in  order  to  dispose  of  the  returned  mer- 
chandise at  a  great  sacrifice.  It  does  not  appear, 
however,  that  more  than  $25,000  can  be  realized  on 
the  $100,000  worth  of  merchandise  thus  being  disposed 
of.  So  far  as  the  inventory  in  this  country  is  con- 
cerned, the  home  market,  which  had  ne\'er  been  con- 
sidered seriously,  is  a  very  uncertain  element. 

A  number  of  the  smaller  mercantile  creditors  are 
now  pressing  the  company  and  threaten  to  throw  it 
into  bankruptcy.  The  banks,  however,  have  agreed 
to  loan  further  to  the  Y.  Company.  A  plan  is  now 
being  worked  out,  in  accordance  with  which  the  com- 
pany  is   offering   to   pay   its   mercantile   creditors   a 


432  PROBLPmiS  IN  BUSINESS  FINANCP^ 

"composition"  of  fifty  cents  on  the  dollar,  which  is 
probably  decidedly  more  than  the  dividend  which 
would  be  received  as  a  result  of  bankruptcy  pro- 
ceedings, since  all  unsecured  creditors  would  then 
share  alike.  The  bankers  think  that  they  will  ulti- 
mately be  able  to  work  out  of  their  difficulties,  though 
it  will  be  a  very  long  pull. 

Questions 

1.  As  a  financial  expert  analyze  the  financial  weak- 
nesses of  this  concern  in  its  period  of  prosperity. 

2.  Do  3^ou  think  it  is  following  the  proper  method 
of  solving  its  present  problems? 

3.  As  a  mercantile  creditor,  would  you  be  willing 
to  accept  the  "composition"  ofTered? 

4.  As  the  manager  of  this  concern,  how  should  you 
expect  to  raise  the  money  to  pay  off  the  mercantile 
creditors? 

5.  What  is  your  opinion  of  the  policy  being  followed 
by  the  banks? 


Problem  "^If) 

The  Reorganization  of  a  Cotton  Manufacturing 

Concern  by  a  Bankers"  Committee 

A  banker  presents  the  following  problem : 

The  ....  Company  is  a  cotton  manufacturing 
concern  whose  principal  business  during  the  past 
year  or  two  has  been  the  manufacture  of  tire  fabric. 
The  following  statement  shows  the  condition  of  this 


FINANCIAL  INVOLVEMENTS  433 

company  as  of  April  1,  1921,  at  about  which  time  they 
passed  into  the  hands  of  a  bankers'  committee: 

8tatp:ment  of  the   .    .    .   Company 
April  1,   1921 

Assets 
Cash  on  hand  and  on  deposit.  .  .  .      -1653,521 

Accounts  receivable 060,508 

Merchandise 3,189,136 

Current  Asfiets $4,503,165 

Real  estate  and  buildings 1,967,615 

Investments 639,115 

Prepaid  expenses 83,800 

Treasurv  stock 52,531 

Goodwill 400,000 

$7,646,226 

Liabilities 
Notes  payable  for  boi-rowed  mone\'  $2,710,000 

Accounts  payable 248,715 

Accrued  liabilities 49,255 

Taxes 150,000 

('Krrent  Liahiliiies $3,157,970 

Capital : 

First  preferred $1,420,500 

Second  preferred 974,900 

Common 703,000 

Surplus 1,389,856 

$7,646,226 

In  addition  to  the  figures  given  above  the  company 
had  manufacturing  contracts  of  about  $12,000,000,  and 
had  outstanding  commitments  for  cotton  of  about 
$5,000,000,  against  which  they  had  advanced  $1,000,000, 
the  present  market  for  this  cotton  being  about  one- 
third  less  than  at  the  time  of  contract.  Under  ordi- 
nary conditions  their  cotton  contracts  would  have 
taken  care  of  their  business  for  about  four  months. 

The  company  were  borrowing  from  the  banks  about 
$2,160,000,  against  which  they  had  lines  of  credit 
with  their  banks  of  about  $2,200,000.  Besides  this, 
they  were  owing  for  paper  sold  through  the  brokers 
about  $550,000. 

The  company's  receivables  were  all  good  and  the 
merchandise    item    in    their    statement    included    the 


434  PROBLEMS  IN  BUSINESS  FINANCE 

$1,000,000  paid  against  cotton.  On  the  remainder  of 
the  merchandise  they  would  undoubtedly  have  to 
take  about  a  333-^  per  cent  shrinkage.  The  item  of 
"investment"  was  practically  all  made  up  of  the 
stocks  of  subsidiary  companies. 

The  plan  of  agreement  put  through  by  the  Com- 
mittee was  substantiall}^  along  these  lines: 

To  stop  paying  the  paper  placed  by  the  brokers, 
these  notes  to  rank  the  same  as  the  obligations  of 
the  company's  bankers.  The  banks  are  to  extend 
the  full  amount  of  loans  until  May,  1922,  with  in- 
terest at  8  per  cent.  Merchandise  creditors  are  to 
extend  until  November  1,  1921,  with  interest  at 
8  per  cent.  Cotton  and  yarn  people  agreed  to  post- 
pone delivery  until  May  1,  1922.  Whatever  cotton 
is  withdrawn  is  to  be  paid  for  by  a  preferred  obli- 
gation of  the  company  running  three  months,  for  the 
market  value  of  the  cotton  at  the  present  time. 
The  difference  between  this  price  and  the  contract 
price  is  to  be  covered  by  a  note  payable  May  1,  1922, 
and  ranking  ecjually  with  the  other  extended  notes  of 
the  compan}'.  No  new  cotton  shall  be  bought  until 
all  existing  cotton  contracts  have  been  taken  up, 
unless  a  quality  different  from  that  contracted  for  is 
needed. 

Questions 

1.  ^^hy  should  this  concern  have  been  taken  over 
by  the  banker's  committee? 

2.  What  is  your  opinion  of  the  equitableness  of  the 
plan  of  agreement  put  through  by  the  Committee? 


FINANCIAL  INVOLVEMENTS  435 

Problem  'i'-H) 

How   Shall   a    Company    be   Saved    from    Bankruptcv. 

Part  op^  Whose  Business  is  Cood  and  Part  of 

Which  is  Being  Carried  on  at  a  Loss? 

The  S.  Leather  Company,  a  closely  owned  cor- 
poration, has  owned  and  operated  a  tannery  at  the 
city  of  W.  for  more  than  fifteen  years.  Its  practice 
was  to  tan  leather  on  contract,  and  also  to  buy  hides 
in  its  own  name  for  tanning  and  subsequent  sale. 
In  order  to  finance  its  operations,  the  company  was 
in  the  habit  of  issuing  drafts  to  be  accepted  by  bankers 
and  banking  corporations,  drawn  at  ninety  days'  sight. 
Sometimes  hides  in  the  warehouse  waiting  tanning 
operations  would  be  pledged  to  secure  the  acceptances, 
and  at  other  times  the  acceptances  would  be  made 
against  a  shipment  of  the  tanned  hides.  In  addition 
to  this  use  of  "bankers'  acceptances"  it  was  customary, 
also,  for  the  company  to  borrow  from  several  banks 
without  security. 

Late  in  1919,  the  market  for  leather  began  to  decline 
rapidly,  and  the  S.  Leather  Company  was  facing  the 
possible  loss  of  its  large  inventory,  together  with  the 
cancelation  of  orders  for  tanned  hides.  However, 
the  immediately  maturing  loans  were  renewed  and 
the  banks  carried  the  company  for  eleven  months 
longer.  During  this  time  the  leather  market  became 
exceedingly  dull,  so  that  the  secured  creditors  found 
themselves  with  box  leather  on  their  hands  which  had 
declined  in  value  to  an  unprecedentedly  low  figure  and 
for  which  there  was  practically  no  market  at  any  price. 

The  balance  sheet  of  this  company  for  December, 
1920,  shows  that  the  capital  was  badly  impaired;  cur- 
rent liabilities  at  the  time  exceeding  the  estimated 
current  assets  by  $26,000.  At  the  end  of  the  year, 
the  company  had  on  hand  a  large  stock  of  black  box 
leather,  but  in  addition  found  itself  with  a  considerable 
number  of  orders  to  do  tanning  on  contract.  It  owed 
the  banks  $465,000,  of  which  $125,000  was  considered 
"secured,"  as  there  was  back  of  the  debt  a  pledge  of 
box   leather   which   ordinarilv   would   have   furnished 


436  PHoBI.EMvS  IN  BUSINESS  FINANCE 

more  than  a  sufficient  niai'gin  of  safety  for  the  loan. 
The  mercantile  creditors  were  comparatively  few  in 
number  and  their  claims  were  not  large. 

At  this  time  the  eight  interested  bankers  came  to- 
gether to  plan  for  a  reorganization  of  the  S.  Co.,  since 
it  had  no  money  with  which  to  cai-iy  on  operations. 
Moreover,  on  account  of  the  decline  in  the  value  of 
the  property  and  the  probabilit}'  of  continued  decrease 
in  prices,  the  current  assets  were  estimated  to  be 
insufficient  to  liquidate  the  bank  obligations.  Even 
the  banks  which  had  demanded  ])ledges  of  leather 
now  really  found  then.selves  in  the  position  of  un- 
secured creditors.  Consequently,  payment  of  a  large 
part  of  the  company's  obligations  would  have  to 
depend  upon  the  problematical  future  earnings,  if  it 
^^ere  allowed  to  continue  in  business. 

Upon  investigation  it  was  found  that  the  stock  of 
leather  which  the  company  had  on  hand,  and  part  of 
which  it  had  pledged,  when  given  a  reasonable  market 
value  was  worth  not  more  than  75  per  cent  of  the 
advances  m.ade  against  it.  On  the  other  hand,  the 
company  had  plenty  of  contracts  to  do  tanning  but 
not  money  for  carrying  on  the  operation,  whereas 
most  tanneries  found  it  difficult  at  the  time  to  se- 
cure orders  enough  to  keep  their  plants  in  operation. 

It  should  be  explained  that  this  "contract"  tanning 
was  carried  on  by  the  following  method.  The  hides- 
were  shipped  on  consignment  to  the  S.  Leather  Com- 
pany, which  put  them  through  the  tanning  process 
and  then  sold  them,  receiving  5  per  cent  commission 
on  the  net  sales  price,  in  addition  to  being  paid  for 
the  cost  incurred  in  tanning.  From  the  proceeds  of 
the  sale  the  company  reimbursed  itself  for  tanning, 
took  its  selling  commission,  and  turned  over  the  bal- 
ance to  the  owners  of  the  hides.  There  had  been 
no  losses  on  the  contract  work  and  the  company 
had  always  promptly  paid  ofT  its'  debts  to  the  owners 
of  the  hides. 

The  question  which  the  bankers  now  had  to  face 
was  whether  the  business  should  be  allowed  to  con- 


FINANCIAL  INVOLVEMENTS  437 

tinue,  in  the  hope  that  future  earnings  would  provide 
for  their  reimbursement,  or  whether  it  should  be 
wound  up  and  a  pro  rala  distribution  of  assets  be 
made  before  prices  of  leather  should  drop  further. 
If  the  company  were  to  l)e  allowed  to  continue  in 
business,  an  additional  loan  of  $50,000  or  more  would 
have  to  be  made  immediately  in  order  to  allow  tanning 
operations  to  be  carried  on. 

Questions 

1.  Indicate  clearly  how  you  think  this  problem 
should  be  solved: 

(a)   From  the  point  of   view    of    the    mercantile 
creditors, 

(6)   From  the  point  of  view  of  the  company  itself, 
(c)   From  the  point  of  view  of  the  banks? 

2.  Would  your  answer  be  the  same, 
{a)  If  the  stock  were  widely  held, 

(6)   If  the  mercantile  creditors  were  numerous? 

3.  If  the  bank  loans  wei-e  relatively  small  and  the 
"accounts  payable"  large,  what  would  be  your  solu- 
tion? 


Pkoble.m  "221 

Bankruptcy  of  a  Small  Conckkx  and  Re;)U(;a.\izatiox 

HY   Its  Bank 

The  AI.  Company  was  a  one-man  concern  engaged 
in  making  elevators  and  dumb-waiters  as  well  as  in 
repair  work  on  elevators.  The  business  had  developed 
largely  out  of  original  repair  shop  work  until  it  had 


438         PROBLEMS  IN  BUSINESS  FINANCE 

become  a  very  prosperous  small  company  in  1918. 
The  owner  was  an  excellent  mechanic  and  a  man  of 
unquestioned  integrity. 

Owing  to  war  demands  practically  all  the  foundries 
which  supplied  castings  and  various  accessories  needed 
in  the  construction  of  elevators  w^ere  busy  to  capacity 
and  had  orders  far  ahead.  The  M.  Companj^,  there- 
fore, found  it  almost  impossible  to  secure  needed  ma- 
terials, and  in  order  to  get  them  at  all  it  was  necessary 
to  pay  extremely  high  prices. 

Consequently,  the  owner,  having  more  land  than  he 
needed  for  his  assembling  plant,  decided  that  he  would 
himself  construct  a  small  foundry  to  supply  his  needs 
and  to  enable  him  to  expand  his  business  more  rapidly, 
without  any  of  the  uncertainties  and  losses  which 
seemed  inevitable  while  he  was  forced  to  "beg"  for 
his  materials.  Accordingly,  late  in  1919,  the  M. 
Company,  wdthout  consulting  the  only  bank  from 
w'hich  it  had  ever  borrowed,  and  which,  on  account 
of  the  war-time  prosperity,  had  been  scarcely  resorted 
to  by  the  company  for  loans  during  the  last  two  or 
three  years,  began  to  construct  a  foundry  which  it 
was  expected  would  cost  from  $40,000  to  $50,000. 
As  bills  came  due  covering  the  cost  of  construction, 
all  the  available  cash  of  the  M.  Company  was  used 
up,  and  they  also  began  to  put  off  some  of  their  credi- 
tors in  order  to  pay  the  new  bills  incurred  for  con- 
struction of  plant. 

Early  in  1920,  when  the  job  was  about  half  done, 
the  company  found  that  unless  they  could  raise  more 
money  they  were  in  danger  of  being  forced  into  a  re- 
ceivership b}'  their  various  creditors.  At  this  time, 
therefore,  they  appealed  to  their  bank  for  advice,  but 
their  current  position  was  so  weak  that  not  more  than 
a  few  thousand  dollars  additional  could  be  raised  on  a 
straight  commercial  loan.  Finally,  the  bank,  thinking 
that  the  M.  Company  would  probably  work  its  way 
out  if  business  continued  to  be  reasonably  good, 
agreed  to  take  a  first  mortgage  on  the  entire  plant  to 
the  extent  of  about  $35,000,  and  thus  tide  them  over 


FINANCIAL  INVOLVEMENTS  439 

immediate  difficulties.  Within  a  few  months,  however, 
business  conditions  had  become  so  strained  that  the 
M.  Company  was  again  wholh'  tied  up. 

The  bank  was  their  chief  creditor.  There  were 
in  addition  about  200  small  mercantile  creditors. 
The  approximate  financial  condition  of  the  company 
at  this  time  was  as  follows: 

Assets 

Plant,  etc $80,000 

Receivables 10,000 

Material  in  process 18,000 

Il08;000 

Liabilities 

Capital  stock $10,000 

Mortgage 35,000 

Notes  payable 40,000 

Accounts  payaV)le 23,000 

$108,000 

In  view  of  the  fact  that  the  assets  still  apparently 
exceeded  the  liabilities  the  concern  was  not  yet  tech- 
nically bankrupt.  Consequently,  in  order  to  save  the 
business  if  possible,  an  equity  receivership  was  arranged 
by  the  chief  creditors  so  that  the  assets  might  be 
"conserved  and  increased"  for  the  benefit  of  all. 

The  manager  and  owner  of  the  business  then  en- 
deavored to  effect  some  kind  of  settlement  with  his 
creditors,  which  would  enable  him  to  continue  solvent. 
After  trying  different  plans,  he  finally  asked  them  to 
take  8  per  cent  cun:ulative  preferred  stock  for  the 
amount  of  their  claims  against  the  company.  This 
stock  was  to  be  redeemed  out  of  the  first  earnings  of 
the  company,  and  provision  was  to  be  made  whereby 
a  portion  of  the  issue  would  be  retired  every  six 
months.  It  was  necessary,  however,  that  all  the 
creditors  agree  to  this  ''composition,"  as  otherwise  it 
could  not  be  made  legally  binding. 

Eventualljs  95  per  cent  of  the  creditors,  both  in 
number  and  amount,  agreed  to  the  proposition,  but  one 
creditor  to  whom  the  company  owed  about  $2,000,  and 
two  or  three  very  small  ones,  refused  to  give  their  as- 


440  PROBLEMS  IN  BUSINESS  FINANCE 

sent.  Hence  this  plan  could  not  be  carried  through. 
Bj^  this  time,  however,  the  Habihties  had  sHghtly  in- 
creased. On  a  revaluation  there  was  enougli  shrink- 
age in  the  assets,  particularly  in  the  "materials  in 
process,"  so  that  the  liabilities  somewhat  exceeded 
the  assets,  and  the  concern  was  now  actually  insolvent 
beyond  a  doubt. 

Hence  the  case  was  taken  ()\'er  from  the  equity 
court  to  the  bankruptcy  court,  whereupon  the  lend- 
ing bank,  as  the  only  secured  creditor,  discovered  that 
an  offer  exactly  like  that  made  during  the  receivership 
would  be  legally  binding  if  accepted  by  the  majority  of 
the  creditors.  Inasmuch  as  it  appeared  that  on  any 
forced  sale  a  dividend  of  not  more  than  20  per  cent 
could  be  realized,  the  same  creditors  who  had  earlier 
agreed  to  the  composition  offer  of  preferred  stock  to 
the  full  extent  of  their  claims  again  accepted  the  offer. 
This  was  confirmed  by  the  court  and  thus  all  debts 
of  the  company,  except  the  mortgage  due  to  the  bank, 
were  paid.  The  technical  change  effected  really  re- 
sulted in  the  creation  of  a  new  company  with  much 
greater  capital  and  no  current  liabilities. 

The  corporation  was  turned  back  from  the  bank- 
ruptcy court  to  be  managed  under  the  direction  of  a 
committee  of  three  trustees,  composed  of  the  principal 
credit ors,who  were  to  exercise  supervision  over  its  affairs 
until  the  new  issue  of  preferred  stock  should  be  retired. 

In  order  to  reduce  the  overhead  and  to  gain  money 
for  a  more  speedy  retirement  of  the  stock,  the  trustees 
advised  that  the  foundry  be  sold.  They  were  fortunate 
in  finding  a  buyer  who  was  willing  to  pay  $27,000  for 
the  property,  a  sum  considerably  lower  than  the  actual 
cost,  but  which  would  have  been  very  satisfactory 
under  normal  conditions.  This  purchaser  agreed  to 
pay  from  $4, COO  to  $5,000  annually  on  the  property 
taken  over,  and  gave  the  trustees  a  second  mortgage 
on  the  foundry  as  security.  The  bank  still  held  the 
first  mortgage  which  covered  the  entire  assets  of  the 
original  company.  The  trustees  were  also  given  bj'' 
the  agreement  general  supervision  over  the  new  man- 


FINANCIAL  INVOLVEMENTS  441 

agenieiit  of  the  foundry,  in  order  to  see  that  the  assets 
were  not  wasted  by  tlie  owner  with  a  view  to  "milking" 
the  business  before  tlie  mortgage  should  be  paid. 

In  order  to  effect  furthei'  economies,  part  of  the 
machine  shop,  whicli  \\as  now  i-eally  too  large  for  the 
original  concern,  was  I'ented,  the  overhead  expenses 
were  substantially  cut,  and  the  owner  is  now  carrying 
on  almost  solely  the  elevator  i-epair  work,  and  the  like, 
which  requires  very  little  capital  to  l)e  tied  up  in  ma- 
terials. Accordingly,  at  present  pi'acHcally  no  current 
obligations  are  being  incurred  and  the  receivables  are 
turning  over  rapidly. 

In  this  connection  an  alternati\'e  solution  of  this 
part  of  the  problem,  proposed  by  the  bank  member  of 
the  trustees,  should  be  mentioned.  He  suggested  that 
the  machine  shop  and  foundiy  be  separated,  and  that 
the  latter  should  be  organized  into  a  new  corporation. 
In  accordance  with  this  plan  the  old  concern  would 
have  owned  49  per  cent  of  the  stock  of  the  new  corpo- 
ration, while  the  trustees  would  have  kept  the  bal- 
ance of  power  by  holding  temporarily  2  per  cent  of 
the  stock.  Thus  the  new  concern  could  have  been 
operated  separately  for  the  benefit  of  the  original 
company. 

Questions 

1.  In  view  of  the  steps  which  had  earlier  been  taken 
by  the  M.  Company,  should  they  have  expected  the 
bank  to  lend  them  money  on  a  mortgage? 

2.  Do  you  consider  that  it  was  good  banking  policy 
to  advance  money  in  this  way  at  this  time? 

3.  As  a  mercantile  creditor  would  you  have  been 
disposed  to  accept  preferred  stock  to  co\'er  the  full 
extent  of  your  claims? 

4.  What  is  3'our  opinion  of  the  method  actually 
followed  in  adjusting  the  company's  affairs? 

5.  Is  there  any  reason  to  expect  that  the  alter- 
native scheme  proposed  by  the  banker  trustee  would 
have  been  better  than  the  plan  actually  followed? 


442  PROBLEMS  IN  BUSINESS  FINANCE 

6.  Would  you  be  willing  to  sell  material  on  credit 
to  this  concern  as  reorganized? 

7.  What  do  j'ou  expect  to  be  the  ultimate  results 
of  this  reorganization? 

8.  On  general  principles  do  you  consider  that  the 
business  was  worth  saving? 


Problem  ^'i'i 

Readjustment  of  Debt  and  Capitalization  of  the 

Goodyear  Tire  and  Rubber  Company* 

Till  the  middle  of  1920  the  Goodyear  Tire  and  Rubber 
Company  was  considered  the  leading  factor  in  the 
automobile  tire  trade,  and  was  generally  supposed  to 
be  in  a  strong  financial  position.  However,  it  borrowed 
very  little  directly  from  the  banks,  depending  for  cur- 
rent financing  largely  on  the  commercial  paper  market. 
The  company's  salesmen  had  sold  nearly  $25,000,000 
worth  of  new  7  per  cent  preferred  stock  at  par  during 
the  summer,  much  of  the  stock  being  taken  by  small 
investors.  This  expedient  afforded  only  temporary 
relief.  With  an  oversupply  of  high-cost  inventory, 
and  a  rapid  decline  in  sales,  the  sharp  business  de- 
pression found  the  company  in  a  condition  in  which  it 
was  unable  to  meet  the  demands  of  the  situation.  The 
result  is  the  Readjustment  Plan  summarized  herein. 
This  plan  affords  an  interesting  example  of  the  recon- 

(*Sep  problem  124.) 


FINANCIAL  INVOLVEMENTS  443 

struction  of  a  company's  financial  structure  without 
the  preHminary  step  of  a  receivership. 

HiSTOKY 

The  ( ioocK'ear  Tire  and  Rubl)ei'  Coinpain'  wasincuiporated 
in  1898,  and  has  grown  to  be  the  largest  manufacturer  of 
rubber  tires  in  the  world,  besides  doing  a  large  })us  ness  in 
mechanical  rubber  goods,  such  as  hose,  belting,  packing, 
and  similar  articles. 

The  company's  operations  in  the  past  have  been  extremely 
successful,  and  its  growth  since  its  incorporation  has  been 
enormous.  One  year  ago  it  was  regarded  as  one  of  the 
eminently  prosperous  corporations  of  this  country.  The 
present  difficulties  are  generally  ascribed  to  the  tremendous 
and  rapid  expansion  program  undertaken  in  a  period  of 
inflation  which  culminated  in  the  investment  of  $54,000,0C0 
in  new  plants  and  subsidiary  enterprises  at  the  very  peak 
of  inflated  business  and  prices.  The  resultant  strain  on  its 
cash  resoui'ces,  coupled  with  huge  inventory  losses,  plunged 
the  company  into  vii'tual  insolvency. 

Property 

The  main  factory  of  the  company  is  at  Akron,  Ohio,  and 
the  plant  comprises  14  modern  and  well-equipped  buildings, 
with  a  total  floor  space  of  113  acres. 

In  addition,  the  companj^  maintains  stations  in  most 
of  the  large  cities  of  the  country,  and  through  stock  owner- 
ship controls  a  large  mmiber  of  subsidiary  companies 
engaged  in  similar  lines  of  business. 

Earnings 

Below  is  given  the  income  account  of  the  company  for 
th(^  years  1910-1920,  inclusive. 

Yrs.  ended 

Oct.  31st  Sales  Net  Income 

1916  $59,122,281  S7,456,877 

1917  103,558,669  15,067,765 

1918  122,675,726  16,176,808 

1919  158,258,892  23,759,989 

1920  188,866,024  10,384,908* 

Capitaliz  vTioN — Prior  to  Rfadjustmi  NT 

7%  Preferred  Stock $  65,082,600 

Common  Stock 61,000,000 

Total S126^82;600 

*As  of  October  31,  1920,  inventories  were  written  down  to  market 
values  by  a  deduction  from  this  figure  of  $9,970,000. 


444  PROBLEMS  IN  BUSINESS  FINANCE 

After  complktiox  of  readjustment 

First  Mortgage  8%  Bonds $  30,000,000 

10- Year  H%  DclxMituro  Bonds 27,500,000 

Total  Funded  Del)t S  57,500,000 

Prior  Prcforonco  8%  Stock $  30,342,000 

7%  Preferred  Stock (55,082,600 

Management  Stock 10,000 

Common  Stock 1,000,000* 

Total  Stock $  96,434,600 

Total  Capitalization $153,934,600 

♦Consisting  of  1,000,000  shares  without  jKir  vahie  figured  atSl.OO 
a  share  in  this  capitaHzation. 

Description  and  Distribution  of  New  Securities 

$30,000,000  20-Yi:ar  First  Mortcjage  8^;  Sinkinc; 
Fund  Bonds.  This  issue  is  secured  by  a  first  mortgage 
<jn  all  the  fixed  assets  of  the  company,  and  by  pledge  of 
subsidiary  stocks.  The  entire  issue  will  lie  redeemed  by 
sinking  fund  at  120  through  semi-annual  di'awings  l)eginning 
November  1,  1921.  The  proceeds  from  the  sale  of  these 
bonds  are  to  })e  used  in  part  to  retiiv  bank  loans,  and  in 
part  to  provide  working  capital. 

$27,500,000  10-Year  8%  Debenture  Bonds.  This  is 
the  total  authorized  issue  of  these  debentures  with  the  excep- 
tion of  $2,500,000  to  be  held  in  the  treasury.  Under  the 
Trust  Agieement  the  holders  of  these  debentures  will  be 
entitled  to  10  shares  common  stock  on  or  after  INIay  I,  1922. 
without  additional  payment. 

A  cumulat've  sinking  fund  is  i)rovided  in  the  amount  of 
$1,500,000  a  year,  or  25%  (whichever  is  the  greatei-)  of 
any  balance  after  payment  of  interest  and  sinking  fund  on 
the  First  Mortgage  Bonds,  intere^  on  Dpl)entures,  and 
dividends  on  Prior  Preferred  Stock.  This  sinking  fund  will 
retire  bonds  up  to  110.  These  bonds,  oi-  jiroceeds  from  their 
sale,  will  be  used  in  settlement  of  that  jmrt  of  the  com- 
pany's ])ank  debt  not  taken  care  of  by  the  proceeds  of  the 
First  Mortgage  Bonds. 

$30,342,000  Prior  Preference  S%  Stock.  This  ;vmount 
is  to  be  presently  issued  out  of  a  total  authorized  issue  of 
$40,000,000,  the  balance  to  be  used  as  collateral  oi-  reserve 
for  creditors  not  yet  assenting  to  the  Plan.  This  stock  is 
entitled  to  8'/^  diridends  cumulative  fiom  January  1,  1921, 
before  any  dividends  on  the  Preferred  or  Common  Stock, 
or  before  the  redemption  of  any  Preferred  Stock.     The  stock 


FINANCIAL  INVOLVEMENTS  445 

wi  1  be  utiliziMl  in  scttlcnicntot'  the  companv's  mcrchaiidise 
tlebt. 

Befoi'O  (lividciuls  i!ia>'  he  paid  on  the  Piclci'i-cd  oi-  ( 'oin- 
nion  Stock  a  sinkinj>;  fund  is  to  he  piovidcd  of  not  less  than 
8%  of  the  {)rin('ipal  amount  of  all  First  Mort^aR'e  Bonds 
and  Debentures  retired  (kirin<i-  the  i)recedini>  ycai'. 

."$85,082,600  l"/c  Preferred  Stock.  ^Hiis  stoek  is  to  l)e 
issued  in  exchange  share  for  siiare  for  the  piesent  Preferred 
Stock  now  outstanding  in  the  luinds  of  the  public.  The 
lialance  of  the  authorized  issue,  $450,000,  will  remain  in  the 
treasury.  This  stock  is  entitled  to  l^'^  dividends,  subject 
to  the  lights  of  the  Prior  Preference"  and  Management  stock. 

$10,000  Management  Stock.  This  stock  will  renuiin  in 
the  hands  of  a  banking  committee  composed  of  Messrs. 
Clarence  Dilon,  of  Dillon,  Head  k  Co.,  John  Sherwin. 
Chairman  of  the  Board  of  the  Union  Trust  Company. 
Cleveland,  and  Owen  D.  Young,  Vice-President  of  the 
General  Electric  Company,  oi'  their  successors.  The  right 
to  elect  th("  majoi'ity  of  the  Board  of  Directoi's  is  vested  in 
this  stock,  and  the  stock  is  entitletl  to  maximum  dividends  of 
$80,000  a  year. 

1,000,000  Shares  Common  Stock.  This  stock  is  largely 
to  be  offered  in  exchange,  share  for  share,  for  the  old  stock 
now  outstan(hng. 

QuestionH 

1.  What  appear  to  you  to  be  the  real  causes  of  the 
Goodyear  Company's  financial  difficulties? 

2.  Criticize  this  Readjustment  Plan  from  the  follow- 
ing points  of  view: 

(a)  The  point  of  view  of  the  former  common 
stockholders, 

ih)  The  point  of  view  of  the  preferred  stock- 
holders who  bought  in  1920, 

(c)    The  point  of  view  of  mercantile  creditors, 

{d)  The  point  of  view  of  the  bankers. 

3.  Do  you  consider  any  of  the  provisions  of  the 
"Readjustment"  too  drastic?  If  so,  which  ones,  and 
how  do  3'ou  account  for  them? 


446  PROBLEMS  IN  BUSINESS  FINANCE 

4.  Would  it  have  been  a  wiser  policy  for  the  com- 
pany to  have  borrowed  more  heavily  from  the  banks 
in  normal  times?     Why? 

5.  Did  the  bankers  act  wisely  in  putting  the  presi- 
dent, Mr.  Seiberling,  entirely  out  of  the  organization? 

6.  What  do  you  expect  the  financial  future  of  the 
Goodyear  Company  to  be?     State  your  reasons  clearly. 

7.  What  are  the  essential  differences  between  the 
recent  financial  history  of  the  Goodyear  Company  and 
the  Ford  Company? 

(See  Problem  20) 


Problem  '2*23 

a  histoky  of  the  financial  difficulties  and 

THE  Private  Reorganization  Plans  of 

A  Small  Automobile  Company 

The  O.  Automobile  Company  was  organized  before 
the  War  to  build  a  low-grade  car  selling  for  about 
$800.  Owing  to  the  type  of  car  and  to  the  name, 
which  was  of  foreign  origin  and  hence  not  satisfactory 
for  advertising  purposes,  the  pubhc  never  became 
particularly  interested  in  the  proposition.  Even  when 
the  make  of  car  was  changed  so  that  the  company  was 
putting  out  a  medium  to  high-grade  car,  beginning 
in  1918,  the  indifference  of  possible  buyers  continued, 
so  that  the  O.  Company  did  not  expand  as  rapidly 
as  the  better  'automobile  companies.  Its  growth, 
however,  though  slow%  was  apparently  sure,  and  at 
the  end  of  1918  a  large  "surplus"  was  recorded  on 
the    financial    statement.     This    surplus    appears   to 


FINANCIAL  INVOLVEMENTS  447 

have  been-  partially  earned  and  partially  only  a  book 
surplus  resulting  from  a  mark-up  of  some  of  the  tan- 
gible assets.  It  seems  to  have  resulted  largely  from 
the  fact  that  no  dividends  were  ever  paid  on  the 
common  or  preferred  stock  of  the  company. 

The  end  of  1918  found  the  0.  Company  with 
an  abnormally  high  proportion  of  "accounts  receiv- 
able," largely  resulting  from  their  failure  to  receive 
prompt  payment  on  various  war  orders  which  thej^ 
had  filled.  During  the  following  year  there  was  some 
improvement  in  the  current  financial  position,  though 
the  financial  statement  showed  an  abnormally  high 
amount  of  finished  cars  on  hand  as  well  as  a  great  deal 
of  inventory  of  other  sorts.  ^^Tlile  "accounts  re- 
ceivable" continued  to  decline,  the  relative  propor- 
tion of  inventory  increased  during  the  year  1920,  and 
the  cash  on  hand  became  constantly  less. 

Finally,  about  the  middle  of  1920,  the  0.  Company 
found  themselves  in  an  intolerable  financial  position, 
as  they  could  no  longer  finance  their  sales  in  the  usual 
way — that  is,  by  sight  drafts  on  the  dealers  to  whom 
they  sold.  This  situation  resulted  from  the  generally 
strained  credit  conditions  which  caused  the  Federal 
Reserve  banks  to  regard  automobile  loans  at  that 
time  as  in  the  highly  speculative  class  of  risks.  The 
actual  trouble  commenced  because  the  Federal  Reserve 
bank  of  one  of  the  middle  western  states  refused  to 
rediscount  the  automobile  "dealer  paper"  which  had 
already  been  discounted  by  member  banks. 

It  should  be  explained  at  this  point  that  for  some 
time  it  had  been  the  practice  of  the  O.  Company, 
when  hard  pressed  for  funds,  to  discount  the  sight 
drafts  drawn  on  western  automobile  dealers  at  its  local 
bank,  which  would  then  send  them  on  for  collection. 
However,  when  it  became  known  that  the  western 
banks  were  refusing  to  discount  the  "dealer  paper"  of 
this  automobile  concern,  the  local  bank  refused  to  con- 
tinue its  discounting  of  the  sight  drafts  on  the  ground 
that,  unless  the  dealers  could  raise  funds  by  discounting 
their  paper,  it  would  be  impossible  for  them  in  turn 


448         PROBLEMS  IN  BUSINESS  FINANCE 

to  honor  the  sight  drafts  of  the  manufacturer.  To 
heigliten  the  difhrulty,  also,  a  good  deal  of  friction 
resulted  between  the  producing  company  and  its 
western  distributors,  because  of  the  piling  up  of  de- 
murrage charges  on  shipments  of  cars  which  had  been 
made  and  which  were  not  turned  over  to  them  because 
of  their  inability  to  meet  the  sight  drafts.  This  fric- 
tion was  made  even  more  unpleasant  because  it  had 
been  the  policy  of  the  O.  Company  to  require  a  deposit 
of  from  10  to  15  per  cent  of  the  value  of  the  cars  at 
the  time  when  the  orders  were  placed,  and  in  most 
cases  the  demurrage  charges  rapidly  ate  up  the 
initial    deposit. 

In  the  face  of  all  these  difficulties  the  O.  Company 
continued  for  some  time  to  build  cars.  This  policy 
is  accounted  for  by  two  reasons.  First,  they  had 
unwisely  laid  in  a  large  inventory  which  was  now 
rapidly  falling  in  value  and  which  could  be  no  source 
of  income  to  them  until  the  cars  were  built.  Secondly, 
the  management  of  the  O.  Company  felt  that  the 
situation  would  be  bound  to  improve  by  the  end  of 
1920  or  early  in  1921,  and  planned  to  be  ready  to  supply 
the  trade  at  a  reasonable  figure  as  soon  as  the  period 
of  depression  should  turn  for  the  better. 

It  now  became  necessary  for  the  O.  Company  to 
give  trade  acceptances  for  any  new  material  which 
they  bought,  thus  losing  the  benefit  of  the  cash  dis- 
count. In  many  instances  they  also  took  up  ac- 
counts slightly  past  due  by  giving  trade  acceptances 
to  their  creditors.  When  these  acceptances  came  due 
they  usually  found  themselves  unable  to  make  pay- 
ment and  were  accordingly  forced  to  give  their  notes. 
Before  the  end  of  the  year,  also,  they  had  quadrupled 
the  small  mortgage  which  had  been  originally  placed 
on  their  real  estate,  and  had  in  this  manner  raised  a 
secured  loan  from  their  bank. 

In  spite  of  all  these  attempts  to  tide  the  0.  Company- 
over  current  financial  difficulties,  their  condition 
became  worse  and  worse  with  the  general  business 
depression.     They    constantly    put    off    all    creditors, 


FINANCIAL  INVOLVEMENTS  449 

the  payment  of  whose  accounts  could  be  postponed, 
and  under  the  circumstances  their  banks  would  not 
come  to  their  assistance.  The  officers  of  the  O.  Com- 
pany frequently  found  it  necessary  to  use  their  personal 
funds  in  order  to  meet  the  weekly  payroll. 

Consequently,  by  the  end  of  the  year  production 
had  temporarily  stopped.  Before  conditions  had 
reached  their  worst,  the  0.  Company  endeavored  to 
raise  cash  for  meeting  its  notes  payable  by  making 
a  financial  arrangement  with  the  R.  Motor  Company, 
in  accordance  with  which,  for  a  consideration  of 
$250,000,  the  O.  Company  would  agree  to  stop  build- 
ing its  own  motors  and  use  only  those  made  by  the 
R.  Motor  Company.  While  this  concession  might 
have  been  attractive  in  prosperous  times,  the  R.  Motor 
Company  now  naturally  stalled,  and  negotiations 
were  broken  off. 

Thus  the  0.  Company  came  to  the  beginning  of 
1921  with  its  mercantile  credit  very  seriously  en- 
dangered, with  its  bank  lines  practically  cut  off,  with 
cash  almost  wiped  out,  and  production  practically 
at  a  standstill.  It  had  even  been  impossible  to  get 
any  investment  house  sufficiently  interested  to  help 
in  floating  a  bond  issue,  the  proceeds  of  which  would 
have  been  used  to  furnish  w^orking  capital. 

At  this  point,  the  management  of  the  0.  Company 
decided  to  take  the  onh'  chance  which  remained  be- 
tween them  and  absolute  failure  by  reorganizing  the 
old  company,  or  organizing  a  new  company,  changing 
its  name,  and  changing  the  type  of  car  made.  In 
order  to  effect  this  reorganization,  they  incorporated 
their  own  investment  company,  for  the  purpose  of 
selling  their  securities  in  small  amounts  to  a  widely 
diversified  list  of  purchasers. 

The  following  data  give  in  detail  comparative 
financial  statements  of  the  0.  Company  over  a  period 
of  three  years,  together  with  the  plan  of  reorganization, 
and  the  relation  of  the  securities  of  the  two  newlj- 
organized  companies  to  the  old  company',  as  drawn 
up  by  the  officers  of  the  company.     Some  of  the  mate- 


450         PROBLEMS  IN  BUSINESS  FINANCE 

rial  is  now  being  used  in  oonnoetion  witli  the  prixate 
sale  of  stock. 


Financial  Statements  of  the  O.  Company' 

Assets 

Dec.  31,  Dec.  31,  Dec.  31, 

1918  1919  19'20'' 

Cash *102,G44.4ti  $43,878..53  $0,105.37 

Notes  receivable  of  custom- 
ers             21, .531. 48  7,649.01  7,649.(31 

Accounts  rec.  of  customers. .         475,725.13  105,955.61  83,7.53.28 

Merchandise 

-Fini.shed 132,980.22  310,816.31  260,096.34 

-Unfinished....           11,299.76  101,618..59  127,295.19 

-Raw .55,-591. 18  125,044.27  169,778.10 

-Supplies 69,737..55  11,363.79  34,.506.92 

Liberty  Loan  Bonds 18,900.00  56,1.50.00  41,150.00 

(J nick  Assets $888,409.78  $762,476.71  $7.30,434.81 

Land— Buildings 3.53,887.17  349,623.37  621,000.00 

Machinery— Furn.— Equip. .  .505,294.91  492,718.92  531,743.33 
Investments  (Capital  Stock 

().  Sales  Corp.) 40,000.00  40,000.00 

Deferred  charges — Prepaid 

items 4  J22;22 2,267.58 12,2^14.65 

Total $1,752,319.08$1,647,086.58$1,935,422.79 


Liabilities 

Notes  pavable  for  borrowed 

monev! $12,920.00       .$24,950.00  .$55,550.00 

Notes  payable  for  mdse 220,000.00 

Accounts  payable 281,451.03        47,430.75  27,374.38 

Sundries— Accruals 10,444.16        25,729.85  6,898.63 

Current   Liabilities .$304,815.19      .$98,110.60  .$.309,823^01 

Mortgages  on  Real  Estate...  42,000.00        42,000.00  186,000.00 

Reserve  for  depreciation 209,733.20      250,811.21  322,464.43 

Reserves 12,666.83         12,675.27  12,675.27 

Capital:     Preferred 124, .500. 00       124, .500.00  124,500.00 

Common 200,000.00       200,000.00  200,000.00 

Surplus 858,603.86      918,989.50  779,960.08 

7otal $1,752,319.08$1,647,086.58$1,935,422.79 

Sales $831,191.67$1,011,101.08$1,285,308.46 

Net  Profits 3,946.92         10,622.37 

•  Taken  from  the  Company's  books — not  certified. 

*  Estimated 


FINANCIAL  INVOLVEMENTS  451 

Reorganization  of  the  O.  Ccmpany 
The  following  reorganization  schemes  are  proposed: 

Condition  on  October   1,   1920. 

Estimated  value  of  Current  Assets  based 

on  actual  inventory  at  current  market .  .  $737,329.44 

Current  liabilities. . ." 302,874 . 38 

Net  liquid  a.ssets $434,455 .  Ob 

Permanent  investment  at  values  by  Amer. 
Appraisal  Co.,  preliminary  survey,  De- 
cember 17,  1920 ■ '. $941,250.00 

Less  mortgages 186,000. 00 

Net  equity  in  fixed  assets 755,250. 00 

Total  net  worth $T,l89,705T06 

It  is  indicated  by  The  American  Appraisal  Representa- 
tives that  the  detailed  apprai.sal  of  the  ().  Plant  will  show 
values  several  hundred  thou-;au  I  (l.)llars  more  than  above. 

Present  Capitalization — 

Common  Stock $250,000 

Unissued ,50,000 

Outstanding $200,000 

Preferred $250,000 

Unissued 125,500 

Outstanding 124,500 

Total $324,500 

Increase  capital  of  ().  Company  by  an  increase  of  the 
preferred  stock  to  1675,000.  Declare  stock  dividend  of  250% 
on  the  common  stock  payable  in  preferr  'd  with  the  following 
result,  and  a  stock  dividend  of  27%  on  the  preferred  stock  to 
cover  the  accumulated  dividends  to  date. 

Common .'ii;250,000 

Unissued 50,000 

Outstanding $200,000 

Preferred $675,000 

Unissued 16,885 

Outstanding 7777777. 658,115 

Total $858,115 

Excliange  ().  stock  for  stock  in  X.  Com])any  which  is  to 
be  organized  for  the  purpose  of  financing  and  operating  the 
O.  Company,  1240  par  value  of  X.  common  to  l)e  given  for 
each  .SlOO  par  value  of  M.  common  and  -SlOO  of  X.  preferred 
for  each  $100  of  O.  preferred.  After  stock  dividend  the  fol- 
lowing result  is  achieved.  The  original  subscribers  to  the 
stock  of  the  O.  Company  received  SlOO  of  O.  6%  preferred  and 


■irv2  PROBLEMS  IN   lU'SINESS  FINANCE. 

SlOO  of  O.  common  stuck  for  $1(J0,  ami  as  a  result  of  the  stock 
dividend  and  in  the  transfer  to  the  X.  Co.  will  receive: 

$100.00  O.  6%  pfd-  oris,  sub.— $100.00  X  89f  pi'il.  $8.00  an'l  div. 

250.00  O.  6%  pfd.  st'k  div.—  250.00  X  8'>"f  pfd.  20.00  an'l  div. 

27.00  0.  69;  i)fd.  pfd.  div.—     27.00X89;  pfd.  2.16  an!  div. 
100.00  O.  Coin.  oris,  bonus—  240.00  X  Com. 

$477.00  To'l  O.  st'k  aft.  div.        $617.00  Total  val.  X.  $30.16  an'l  div. 

Which  means  that  the  present  O.  stockholders  will  re- 
(  eive  S617  worth  of  X.  stock  for  each  SlOO  they  originally 
invested,  and  preferred  dividends  of  $30. 1(),  or  S0%  on  the 
original  investment  without  taking  into  account  any  dividend 
on  the  common  stock. 


Financial  Plan  ov  the  X.  Company 

X.  Company — To  })e  organized  for  the  pui-pos(-  (,f  financ- 
ing and  operating  the  O.  Company. 

Capital  1,000,000  .share.s  common,  par  $   1.00 

250,000  shares  preferred,  par    10.00     S';,f  cumulative. 
Common  stock  to  ho  distributed     480,000  to  ().  .stockholders  pro  rata. 

,520,000  to    new    stockholders,    em- 
ployees, underwriters  and 
Investors'  Service  organ- 
ization. 
$1,000,000 

Preferred  stock  to  l)e  distributed      658,115  to  ().  .stockholders  pro  rata 

for  their  holdings  in  the 
().  Co. 
225,000  to    Investors'   Service,  Inc. 
for  125,000  cash. 
1,616,885  to  new  stockholders  for  ca.sh 
Total.  .$2,500,000 

X.  Companv  to  sell  immediatelv  upon  (organization  to 
Investors'  Service,  Inc.,  S22."),000  preferred  f.or  8125,000  cash 
to  secure  sufficient  cash  to  finance  sale  of  new  stock  and  to 
furnish  necessary  cash  to  O.  Co.  to  get  into  operation 
to  take  care  of  the  spring  demand  for  automol)iles.  All 
money  advanced  to  the  O.  Company  by  the  X.  Company 
will  be  in  the  forms  of  loans  secured  by  liond  issue  to  be 
placed  on  the  O.  plant,  equipment,  etc. 

The  preferred  stock  of  the  X.  Company  to  be  sold  tc 
the  public,  it  is  estimated  will  be  sold  at  a  maximum  cost 
of  22%,  with  the  result  that  the  $1,616,115  par  value  pre- 
ferred will  be  sold  at  a  minimum  of  78%,  or  -$1,287,390  cash, 


FINANCIAL  INVOLVEMENTS  453 

with  following  result  in  the  financial  condition  of  the  X.  Co. 
after  givinji  effect  to  this  financing: 

Assets  Liabilities 

Cash 

From  Investors"  Serv.  $    12o,(J0U.()()       Preferred $2,500,000.00 

From  pfd,  stock  sales.    1,261, 170. :^()       Coniinon 1,000,000.00 

O.  common 200,000.00       .Surplu.s 531,590.06 

0   preferred 058,1 15.00  Total $4,031,590.06 

O.  surplus 331,590.06 

*Contraots  and  other 
reorganization  items..     1,455,714.70 

Total  assets $T,031,59(l06 

*Tlus  item  is  to  off.set  the  conunon  stock,  the  preferred  stock  hoiius 
to  the  Investors'  Service,  Inc.,  and  the  co.'^t  of  sellinf;;  the  ])referred  stock 
to  the  public. 

This  statement  does  not  take  into  account  the  greater 
value  of  the  0.  plant  and  equipment  which  is  indicated  by  the 
American  Apj^raisal  Company  to  be  approximately  .1250,000 
more  than  shown  by  the  0.  statement.  It  does  show  a  sur- 
plus which  assui'es  dividends  on  the  entire  issue  of  h%  pre- 
ferred stock  for  a!iuo--!t  thr?e  y(>ars  to  come. 

Stock-Sellixci  Campaign 

The  X.  prefei'rcd  stock  will  Ix'  sold  to  the  public: 

First. — Thi'ough  a  luail-ordcr  campaig;n  patterned  after 
the  campaign  used  by  two  other  motor  companies,  one  of 
which  sold  S9()0,0()()  worth  of  stock  durinfi'  the  last  seven 
months,  and  the  other  stai-t(>d  a  campai^u  Octolv^-  first  and 
has  averaged  $50,000  worth  of  -tock  monthly  since  that  time. 
Neither  of  these  companies  has  the  plant,  the  assets,  or  the 
past  record  of  earnings  of  the  O.  Co.,  which  is  the  foundation 
of  the  X.  Co.  The  cost  of  selling  the  stock  of  one  of  these 
companies  has  averaged  ai:)jir()ximat(>ly  12^'( . 

Second. — By  organizing  a  sales  force  consisting  of  high- 
grade,  experienced  stock  salesmen,  who  have  been  district 
managers  and  repi'(\-<entativcs  of  investment  banking  houses, 
spec'alizing  in  selling  safe  and  attracti\-e  pi'eferred  stocks 
to  the  small  investor,  by  intensive  selling  methods.  We  have 
a  nucleus  of  this  organization  already  arranged  for.  One 
of  the  organizations  with  which  we  aie  fanuliar  has  sold 
on  an  average  of  .1800,000  worth  of  such  stock  per  month 
for  the  past  year  in  one  state  at  a  cost  not  to  exceed  18%. 

Third.— Bv  tuining  over  to  brokerage  houses  lots  of 
$50,000  to  .'§100,000  to  offer  to  their  regidar  clients— at  a 
cost  not  to  exceed  20'  ^ . 

We  estimate  selling  a  mininmm  average  of  JSftO.OOC 
monthly,  the  first  twelve  months,  and  SI 00,000  monthly 
the   second  twelve  months. 


454  PROBLEMS  IN   BUSINESS  FINANCE 

Purpose  or  Organization  of  the  X.  Company 

The  X.  Co.  has  been  organized  for  the  following 
purposes : 

Firf^t. — To  supply  the  lu'cessary  funds  to  propei'ly  financo 
the  operations  of  the  O.  Co. 

Secoutl.- — To  properly  advertise  and  merchandise  its 
products. 

Thirtl. — To  have  a  Board  of  Directors  composed  of  success- 
ful men  of  mature  judgment  to  insure  the  best  policy  of 
operations. 

Fourth. — To  supply  mana<iement  of  past  proven  success 
to  thoroughly  develop  every  facility  of  the  ().  Co.  by  putting 
its  operation  on  the  most  modern  and  efficient  basis,  to  insure 
dividends  for  the  stockholders,  and  a  progressive  institution. 

Fifth. — To  develop  the  present  product,  the  ^Master  Six, 
and  a  new  four-cylinder  car,  the  X.  P\)ur,  to  complete  the  line, 
which  will  make  ]")ossible  better  dealer  representation,  and  give 
greater  volume  of  production  of  a  less  fluctuating  character. 

The  X.  Four,  which  Mr.  ().  is  now  designing,  will  stand  out 
in  comparison  with  the  four-cylinder  cars  now  on  the  market 
l)ecause  of  its  advantage  in: 

Lower  first  cost 
Greater  gasoline  mileage 
Greater  tire  mileage 
Finer  appearance 
Easier  riding  qualities 
and  meet  the  trend  of  the  industi'y  and  demand  for  economy 
and  luxury  at  low  initial  cost. 

Estimate  of  Profits  of  X.  Company 

The  past  experience  of  the  0.  ( 'o.  indicates  that,  with  the 
adequate  capital  and  other  facilities  made  possible  by  the 
reorganization,  there  will  be  a  minimum  production  for  the 
first  year  of  3,000  cars,  which,  on  a  minimum  net  profit  of 
8%,  would  show: 

2,000  Master  Six  Cars  @  .li;  1,400  net  =  $2,800,000 
1,000  W.  Four  Cars       @  $1,000  net  =    1,000,000 

$3,800,000 

8%  profit 

NET  PROFIT $    :304,000 

Less  dividend  requirements  on  $1,. 500,000  preferred.       120,000 
.\vailable  for  dividend  on  coninif)n  stock $    184,000  or  1S% 

As  the  0.  Plant  has  produced  as  high  as  40  cars  per  day, 
a  much  greater  production  is  possil)le  in  future  years,  and 


FINANCIAL  INVOLVEMENTS  455 

with  the  coinplctc  Hnc  of  both  a  six-cylinder  and  a  four- 
cylinder  car  a  much  greater  demand  can  t)e  expected.  If  this 
first  year's  estimated  pixxiuction  is  only  tripled  in  succeed- 
ing years  and  but  V2'  l  profit  is  realized,  the  earning  will  l)e: 

4,000  six-cvliiulcr  curs     @  Sl,40()  ii('t=$  5,000,000 
,■),()()()  lour-cyliiulor  cars  (a)  $1,000  not  =     5,000,000 

$10,600,000 

12%  profit 

$  1,272,000 
Less   dividend    nHiuirciniMits  oii  entire  $2,r)00,0()0 

preferred 200,000 

Avcailable  for  dividends  on  conunon  stock $   1,072,000 or  707% 

And  (he  new  fitmncimj  .should  put  Ihe  conipani/  >n  a  position 
to  pntj  out  hiij  dividends  to  the  stnelxholdcrs,  itislcid  of  keeping 
the  profits  in  the  hiisincxs  to  nrtlce  expansion  pnssihlc. 

Management 

President  and  Consulting  Engineer.,  C.  H.,  who  has 
concentrated  his  energy  on  the  development  of  the  automo- 
bile industry  since  its  beginning,  having  previously  devoted 
his  activities  to  manufacturing  and  engineering  enterprises. 

Vice-President  and  General  Manager,  M.  C,  for- 
merly Vice-President  and  General  Manager,  Blank  Bronze 
Corporation,  who,  though  still  a  comparative!}'  young 
man,  has  a  record  of  successful  accomplishment  as  a  manu- 
facturer and  sales  and  financial  executive.  A  director  of  the 
P.  Association  of  Credit  Men,  the  Blank  Bronze  Corpora- 
tion, the  P.  Stamping  Co.,  and  other  successful  enterprises. 

Treasurer  and  Counsel,  W.  J.  B.,  Attorney  at  Law, 
director  of  the  C.  National  Bank. 

Secretary,  E.  H.,  law  student  at  Coiiiell  University 
previous  to  his  twelve  years'  association  with  the  ().  Co.,  as 
sales  manager,  manager  of  bi'anches,  and  \n()vv  recently  as 
president. 

The  Boaicl  of  Directors  to  be  composed  of  such  men  as: 

G.  W.  B.,  Chairman;  Vice-President,  A.  Trust  (^o.;  Presi- 
dent R.  Motor  Co.,  and  B.  Products  (^orp. 

C.  H.,  President  and  Consulting  Engineer;  Founder  and 
active  head  of  the  O.  Co. 

W.  J.  B.,  Treasurer  and  Counsel;  Director,  The  ^C. 
National  Bank. 

M.  C,  Vice-President  and  General  Manager;  Director, 
Blank  Bronze  Corporation,  P.  Stamping  Co.,  Civic  Build- 
ing and  Loan  Association. 

C.  J.,  Secretary,  E.  Watch  Co. 


456  PROBLEMS  IN  BUSINESS  FINANCE 

i:xniiiiT  A 

On  May  0,  11)21.  a  new  fii'iii  of  accountaiits  drew  up  the 
followinfi  coinparativc'  statciiuMil ,  indicating-  that  the  (). 
Company  is  to  Ix-  ahsorhod  l>y  the  X.  Conii)any. 

L.  E.  B.  ct  Co. 

Certified  Puhhc  Accountants, 

Philadelphia,  Pa. 
Exhibit    re    the    O.    Company    and    the    .\.    C()m])any, 

licfiuduciiuj  Plan. 

1st.  Financial  condition  of  the  O.  Company  as  of  Decem- 
ber 31,  1920,  per  its  books.  Plant  account  being  adjusted  to 
accord  with  the  American  Apf)raisal  (^omjiany's  valuations 
or  with  bona  fide  ]~>id  prices;  inventoi'ies  pric(>d  conservativi^ly, 
and  with  adeciuate  reserves  for  lo.sses  in  cui'rent  assets. 

2nd.  Givinji-  effect  to  an  issue  of  $2,500,000  Preferred 
and  $1,000,000  Common  Stock  of  the  X.  Company,  to 
acquire  the  assets  of  the  0.  Company  as  of  December  31, 
1920,  and  provide  additional  working  capital,  increase 
plant  facilities,  and  reduce  liabilities. 

A.ssets 

No.  1  No.  2 

O.  Company  X.  Compauv 

Dec.  31,  1920  with  Financiiif!; 
Plan  in  effect 

Cash,  Accounts  Receivable,  Inventories.    $645,627.2*)  $1,731,296.83 
Investments:        Bonds,    Real    Estate, 

Mortgages  (Net  Equity) 137,756.57  137,756.57 

Plant  and  Equipment,  Less  Deprecia- 
tion (O.  Co.,  per  American  Apprai.sal 

Co.) 1,306,474.11  1,406,474.11 

Prepaid,  Interest,  In.surance,  etc 9,357.73  9,357.73 

$2,099,215.70  .$3^84,885.24 

Intangibles: 

Contracts,  Goodwill,  etc 900,000.00 

Refinancing  Costs  Estimated 355,572.46 

$2,099,215^70  $4,540,45870 

Liabilities 

Notes  and  Accounts  Payable $364,797.78  $164,797.78 

Accrued  Accounts.  Taxes,  Interest,  etc.          3,436.81  3,436.81 

Mortgage  on  Plant 150,000.00  150,000.00 

Reserve  for  possible  Inventory  Depre- 
ciation  59,417.65  59,417.65 

$577,6'52724  $377,652.24 
Capital  Stock: 

Preferred $158,757.00  $2,500,000.00 

Common 200,000.00  1,000,000.00 

Surplus 1,162,806.46  662,806.46 

$2,099,215.70  $47540,458.70 


FINANCIAL  INVOLVEMENTS  457 

On  March  1st.  1921,  the  O.  Oonipany  authorial  $()()(),()0() 
of  IwiHJs,  pondiiifi-  the  consummation  of  the  above  hnaticinji; 
plans,  when  tlie  bond  issue  will  ]w  retii'ed. 

Theal)0ve  l)alanc('  slieet  of  the  O.  Company,  as  of  Decem- 
ber 31,  1920,  is  in  accord  with  said  Company's  books,  and 
the  balance  sheet  for  the  X.  Company,  showing  the  effect 
of  the  refinancing  plan  as  outlincMJ,  in  om*  opinion  is  correctly 
stated. 

(Sijiued)      L.    Iv   H.  iV:   Co. 


EXHIBIT  B 
Plan  of  the  Investors'  Service  Co.,  Inc. 

Organized  to  finance  the  sales  of  X.  Company  preferred 
stock : 

Capital 

1,250  sliares  no  par  value  stock. 

1,2.50  shares  8%  cumulative  preferred  .stock,  par  value  .?100. 

To  be  offered  to  stockholders,  officers  and  employees  of  O.   Company 
and  others  interested  in  the  development  of  the  O.  Company. 

Offering: 

1  share  preferred,  i)ar $100 

1  share  no  par  value  common 

For $100 

Assessment  for  expenses 1 

$101 
Total  issue  preferred,  1,250  shares. 
Totarhic'ome..TT77.  .  .  T!7.  T.TTT.TT7r.Tr. "  $126,250 

Initial  corporate  set-up  Cash $126,250 

Total  Assets 126,250 

Preferred  stock $125,000 

No  par  value  (1,2.50  .shares)  common. 

Surplus li^oO 

Total  liabilities $126,2.50 

Investors'  Service  to  enter  into  a  contract  to  buy  first 
$125,000  of  preferred  stock  in  X.  Company  and  to  be  given 
bonus  of  S100,000  preferred  stock  anrl  .1?62,.'>00  common  in 
consideration  of  making  the  initial  investment  to  finance  the 
sale  of  the  preferred  stock  issue  of  the  X.  Company. 


458  PROBLEMS  IN  BUSINESS  FINANCE 

Financial  scl-u])  of  Investors'  Service  after  purchase  of 
X.  pref ened. 

Assets 

Cash $1,250 

Securities 125,000 

and   $100,000   X    preferred    (distributed   direct   to 

stockholders  pro  rata.) 

X  common 12,500 

and $50,000  X  connnon  (distril)uti'd  direct  to  stocic- 
holders  pro  rata.) 

Total $138,750 

I.iahilitics 

Preferred  stock   $125,000 

No  par  value  (1,250  shares)  common 

Surplus 13,750 

Total $138,750 

RESULT:  A  subscriber  to  $1,000  worth  of  Investors'  Service,  Inc., 
preferred,  would  get  immediately  his  subscription  is  paid: 

$1,000  Investors'  Service  8%  prefeired 
800  X.  Co.  %'/o  preferred 
400  X.  Co.  N.  P.  V.  common. 
$2,200  Value  of  securities. 
Payment $1,010  Cash— $1,000  for  stock  and  $10    for    ex- 
penses. 

Gain $1,190  greater  value  of  aecuritie^  than   in- 

vedmenl 

Investors'  Service  to  receive  commission  of  13^%  on  the 
.'^1,600,5(30  preferred  stock  in  X.  C'ompnny  to  be  sold  to 
public,  and  25%  of  the  saving  or  difference  between  22% 
and  the  actual  cost  of  selling  the  X.  preferred.  It  is  esti- 
mated that  this  plan  will  make  possible  marketing  the  X. 
stock  at  a  cost  not  to  exceed  16%,,  which  will  mean  a  saving 
of  6%,  or  13^%  for  the  Investors'  Servic(%  which  will  make 
the  income  of  the  Investors'  Service,  Inc.,  as  follows,  over 
the  two  years'  period  required  to  sell  the  stock: 

Income 

Stock  sales,  Investors'  Service $125,000.00 

Assessment  for  expenses 1,250 .  00 

Commission  on  X.  stock  sales 24,757. 50 

Bonus  on  saving  in  cost  of  stock  sales 24,757. 50 

2  years'  dividend  on  X.  preferred  stock 20,000.00 

$195,765.00 

Disbursements 

Purchase  of  X.  preferred $125,000 .  00 

Expen.se  of  organization 1,2.50.00 

Dividend  2  years  on  Investors'  Service  p.eferred 20,000.00 

Balance  on  profit 49,515 .  00 

$195,765.00 


FINANCIAL  INV0LVEMI<:NTS  459 

This  will  show  a  slatciiiciit  at  close  of  2  years  of  Investors' 
Service,  Inc. 

Cash $49,515 .  00 

Securities^X.  prclVrred 125,000 .  00 

Securities— X.  common r2,500.00 

$1S7,015  ()0 

Prefenc  d  uutstaiuling 125,000.00 

No  par  value  (1,250  shares) 

Surplus 62,015.00 

$187,015!  00 

1,250  shares  N.  P.  V.  worth  |()2,()I5.  Sinplus  =  $49.61, 
value  (^ach  shai-e  common. 

For  original  investment  of  $1,U1(): 

10  shares  Investors'  Serv.  pfd.     (gi  $100  par =$1,000 .  00 

SO  shares  X.  i)refenTd                 (a       10  par 800.00 

400  shares  X.  common                  (a         1  par 400.00 

10  shares  Investors"  Serv.  no  jKir  value 496.  10 

2  vears  tlividend  8%  X.  Co 128 .  00 

2  years  dividend  8%  Inv.  Serv.,  Inc 160.00 

Total  securities  and  income .$2,984. 10 

Less  investment 1,010 .  00 

L97%  net  projil  tr/thiu   .'  tjcars S1,974.W 

This  plan  will  be  adopted  for  the  j)urpose  of  financinfj; 
the  X.  Co.  at  a  lesser  cost  and  on  a  more  satisfactory  basis, 
with  the  same  results  as  if  the  stock  were  underwritten 
by  the  usual  investment  bankinji"  house.  Still  a  nice 
profit  is  possible  for  th(>  stockholders  of  the  Investors' 
Service,  Inc.,  who  in  effect  form  an  underwriting  syndicate. 

Every  stockholder  subscribes  on  exactly  the  same  basis 
and  shares  in  the  i)rofits  proportionately. 

There  will  be  no  expense  to  the  operation  of  the  In- 
vestors' Service,  Inc.,  other  than  the  $1,250  collected 
originally  for  this  ])Ui'i3ose.  II f nee  nil  llie  inecnie  in'll  he 
profit. 

Questions 

1.  What  is  your  opinion  of  the  financial  manage- 
ment of  the  O.  Company  before  the  attempted  re- 
organization? 

2.  Analyze  critically  and  from  all  points  of  view,  the 
plans  for  refinancing  the  O.  Company  and  organizing 
the  X.  Company  and  the  Investors'  Service  Corporation. 

3.  ^^Tlat  do  you  expect  the  future  of  this  concern 
to  be?     State  your  reasons  clearly. 


PART  V 
GENERAL  PROBLEMS 


CHAPTER  XI 

GENERAL  SURVEY  PROBLEMS 

THE  excuse  for  this  final  chapter  is  the  following 
problems  themselves.  They  touch  in  an  un- 
usually significant  manner  upon  most  of  the 
principles  of  financing  a  small  business  which  have 
alread}'  been  discussed. 

The  first  problem  (224)  is  a  refreshing  example  of 
the  sort  of  success  that  can  be  achieved  by  a  man  of 
no  original  business  training,  who  is  guided  solely  bj^ 
an  unusual  native  common  sense — where  one  might 
least  expect  to  find  it. 

The  second  problem  (225),  which  might  have  been 
included  in  the  preceding  chapter,  paints  the  life  history 
of  a  typical  "war  baby."  It  might  w^ell  have  been 
labeled  "From  Birth  to  Death  in  Four  Years." 

The  third  problem  f226)  very  nearly  runs  the  gamut 
of  all  the  financial  experiences  which  a  small,  recently 
launched  concern  might  meet.  The  manager  of  this 
little  concern  should  be  able  to  draw  some  helpful 
lessons  from  the  other  two  problems. 


Problem  'i'ii 
The  Financial  Growth  of  a  Small  Muskal  Concern 

Some  tw^enty  years  ago,  Mr.  Y.  was  employed  as  a 
musician  playing  in  theatre  orchestras  in  one  of  the 
leading  cities  in  the  United  States.  Having  left  school 
at  the  age  of  twelve,  he  had  spent  more  than  twenty 
years  of  his  life  on  trivial  jobs  of  various  kinds, 
though  his  chief  interest  was  music.  On  one  occasion 
he  washed  to  purchase  an  improved  type  of  the  wind 

462 


GENERAL  PROBLEMS  46;^ 

instrument  which  he  usually  played,  and  which  it  was 
necessary  to  import  from  Europe.  The  only  dealer 
who  at  the  time  handled  instruments  of  this  sort  in  this 
city  was  unwilling  to  take  the  trouble  of  importing 
the  instrument  desired. 

Being  disappointed,  Mr.  Y,  ordered  an  instrument 
from  the  European  firm  which  dealt  in  the  article.  As 
this  was  the  first  order  which  they  had  received  from 
that  locality,  they  offered  to  make  Y.  their  agent  on  a 
small  scale.  He  thereupon  decided  that  it  might  be 
worth  while  to  conduct  this  little  business  as  a  side  line, 
since  he  would  have  an  opportunity  to  sell  some  in- 
struments to  his  friends. 

Accordingly,  with  practically  no  capital,  he  began 
to  take  orders  from  his  friends,  securing  advance 
payment  so  that  he  could  import  the  instruments  from 
abroad.  For  convenience  he  soon  opened  up  a  little 
store  composed  of  one  room  nine  by  eleven  feet  in  size, 
and  began  to  do  a  small  jobbing  business  in  other 
instruments  as  his  friends  desired.  During  this  time, 
also,  various  requests  came  to  him  for  repair  work  in 
connection  with  the  type  of  instruments  which  he 
dealt  in.  Some  of  the  simpler  repairs  he  was  able  to 
make  himself,  though  he  was  not  by  any  means  a 
mechanic,  and  some  he  managed  to  have  done  by  a 
repair  man  of  unusual  skill. 

At  the  end  of  a  year,  Y.  had  saved  about  $1,000. 
As  the  business  grew,  he  persuaded  the  repair  man,  Z., 
to  work  for  him  regularly  so  as  to  repair  satisfactorily 
all  the  instruments  that  Y's  friends  brought,  and  paid 
him  a  fair  amount  for  his  goodwill.  Thus,  Y.  really 
secured  a  monopoly  on  the  wind  instrument  repairing 
business,  and  it  grew  steadily  during  the  next  two  years, 
within  which  time  the  dealer  who  had  originally  re- 
fused to  purchase  the  needed  instrument  for  Y.,  fell 
into  financial  difficulties  and  was  forced  to  sell  out  to 
Y.,  who  took  over  the  importing  part  of  his  business. 
This  Y.  did  by  paying  the  dealer  .S2,000  in  cash  and  the 
balance  of  $18,000  in  notes  due  over  a  period  of  five 
years. 


4(54  PROBLEMS  IN  BUSINESS  FINANCE 

In  two  or  three  years  more,  Y.  started  a  small  music 
publishing  business  in  connection  with  his  importing 
and  repair  work.  This  part  of  the  business  was  com- 
bined with  another  small  publishing  company  and 
eventually  the  entire  interest  was  bought  out  by  Y. 

During  this  time  Y.  and  his  repair  man  had  begun  to 
manufacture  some  small  articles  which  were  needed  in 
connection  with  wind  instruments,  to  supply  the  needs 
for  repair  purposes.  In  the  course  of  time  it  was 
natural  that  they  should  occasionally  attempt  to  make 
for  their  friends  instruments  which  at  the  time,  for 
some  reason  or  other,  it  was  difficult  to  import.  This 
sort  of  work  was,  of  course,  at  first  regarded  merely  as 
an  experiment,  but  it  gradually  grew  to  be  a  serious 
part  of  the  business.  When  Y.  found  that  the  profits 
in  manufacturing  were  nmch  higher  than  the  profits  on 
the  goods  which  he  imported,  he  began  more  actively 
to  push  the  production  of  insti'uments.  It  was  fortu- 
nate, therefore,  that  the  repair  man,  Z.,  had  two  sons 
who  were  skilful  mechanics  and  who  learned  the  art 
of  making  certain  of  the  instruments.  In  a  few  j^ears 
other  skilful  workers  were  added  to  the  force  of  em- 
ployees, until  manufacturing  became  the  chief  part  of 
the  business. 

It  was  not  long  before  Y.  discoxered  that  his  old 
repair  man,  trained  in  Europe,  and  following  antiquated 
methods,  failed  to  realize  the  possibilities  of  scientific 
mass  pi'oduction.  He  attempted  to  perform  all  of  the 
making  operations  himself.  Y.,  though  having  no 
precedent  to  follow,  decided  that  the  work  was  of  such 
a  nature  that  the  operations  could  be  greatly  simplified. 
His  aim  was  to  divide  the  task  to  such  an  extent  that 
individual  operations  would  be  simple  and  could  be 
carried  out  b}-  workers  having  only  a  reasonable  degree 
of  skill,  in  man}'  cases  by  young  persons.  It  accord- 
ingly became  necessary  for  Y.  to  pension  his  repair 
man,  whose  skill  had  started  the  manufacturing,  and 
to  leave  the  guidance  of  the  work  largely  to  Z's  sons, 
who  had  by  this  time  thoroughly  mastered  the  pro- 
duction end  of  the  business.     In  course  of  time,  also, 


GENERAL  PROBLEMS  465 

machinery  was  developed  for  performing  the  simpler 
operations. 

The  introduction  of  machinery  gave  Y's  business  a 
definite  advantage  over  that  of  other  producers  both  in 
this  country  and  in  Europe,  inasmuch  as  his  labor  costs 
were  greatly  reduced.  Further,  it  was  possible  to  keep 
his  plant  operating  rather  evenly  throughout  the  year 
by  hiring  during  the  summer  young  persons  who  could 
readily  be  taught  to  perform  the  simpler  operations 
connected  with  the  making  of  instrument  parts, 
later  to  be  assembled  as  the  orders  came  in.  After  Y. 
began  to  know  his  market,  he  followed  the  policy  of 
making  up  parts  for  twice  the  number  of  instruments 
called  for  by  the  orders  on  hand.  He  found  that  the 
unit  cost  of  making  them  in  this  manner  was  very 
greatly  reduced. 

In  1915,  Y.  found  it  necessary  to  change  his  quarters 
in  order  to  get  all  of  his  manufacturing  business  under 
the  same  roof.  He  accordingly  waited  for  an  oppor- 
tunit}'  to  buj'  a  satisfactory  building  which  was  on  the 
market  under  a  forced  sale.  This  building  was  in  a 
locality  slightly  removed  from  the  business  and  manu- 
facturing center  of  the  city,  but  as  there  was  an  op- 
portunity to  secure  the  building  for  about  60  per  cent 
of  its  assessed  ^'alue,  Y.  thought  it  best  to  buy  and  so 
keep  down  his  overhead.  In  order  to  purchase  this 
building,  he  assumed  a  first  mortgage  of  $10,000,  and 
borrowed  the  l)alance  of  $12,000  from  the  one  bank 
with  which  he  had  made  connections.  Y.  explains 
that  the  bank  loaned  solely  on  the  strength  of  his 
character  and  success  in  business. 

During  the  war  the  import  market  was  cut  off,  and 
Y.  had  a  number  of  opportunities  to  take  over  large 
orders  from  the  Government.  He  refused,  however,  to 
accept  any  orders  that  would  make  it  necessary  for 
him  to  launch  upon  a  policy  of  expansion,  which  would 
necessitate  an  increase  of  capital  and  plant  arid  a  re- 
sultant growth  in  fixed  investment.  He  contended 
that  there  is  no  real  and  worth-while  growth  but  slow 
growth. 


466  PKOHLEMS  IN  BUSINESS  FINANCE 

In  July,  1921,  Y's  current  position  was  as  follows: 

Current  Assets  Current  Liabilities 

Cash $13,000      Accounts  paval^le  (dur- 

Receivables 50,000  ing  the  month . ) $3,000 

Inventory 75,000  §3  qoO 

$138,000 

The  inventory  consisted  of  about  $30,000  in  metal 
plates,  for  printing  music  and  instruction  books  to  be 
used  with  the  tj'pe  of  instruments  made,  $15,000  in 
finished  goods,  and  $15,000  in  goods  partially  finished, 
the  balance  being  in  raw  materials.  Ihe  inventory  is 
relatively  higher  than  is  normally  carried. 

The  receivables  consisted  of  about  $12,000  due  from 
the  Government  on  a  large  order  which  the  company 
is  now  filling.  The  rest  is  due  partially  on  open  account, 
partially  on  goods  consigned  to  small  and  preferred 
dealers,  and  the  balance  on  goods  sold  to  jobbers  and 
agents  through  a  conditional  sales  agreement.* 

The  liabilities  shown  are  negligible.  Y.  explains  that 
he  has  built  up  his  business  solely  out  of  profits  and 
always  takes  his  cash  discounts.  He  has  never  bor- 
rowed, for  working  capital  purposes,  more  than  $8,000 
from  his  bank  at  one  time,  and  his  total  bank  borrow- 
ings since  he  began  his  business  have  been  little  more 
than  $150,000.  This  concern,  being  unincorporated, 
has  never  been  required  to  file  a  statement  of  condition 
with  the  State  authorities,  nor  has  the  owner  ever  given 
his  bank  a  statement.  Mr.  Y.  is  so  conservative  that 
he  has  not  even  given  the  information  which  would 
enable  him  to  get  a  rating  from  Dun's  or  Bradstreet's. 

Y.  is  uncertain  as  to  the  exact  value  of  his  fixed  assets. 
The  building  and  real  estate  which  were  bought  at  a 

*It  should  1)0  explained  that  the  tenu.s  of  sale  of  this  concern  are 
rather  fiexil)le.  Due  to  the  lack  of  comjietition  on  high-grade  instru- 
ments it  is  possible  to  make  very  high  profits  on  many  articles  sold, 
hence  it  frequently  happens  that  a  chance  is  taken  on  a  customer 
whose  credit  may  not  be  wholly  certain.  While  the  usual  terms 
given  are  2',f-l()  days  and  30  days  net,  large  cjuantities  of  goods  are 
sold  to  jobbers  and  agents  on  conditional  sales  contracts,  and  many 
are  sold  to  small  or  preferred  dealers  on  consignment.  The  comi)any 
is  willing  to  take  back  goods  which  its  jjurchasers  are  unable  to  sell 
(See  Credit  Man's  Diary,  1921,  pages  109-121.) 


GENERAL  PROBLEMS  id? 

bargain  are  now  probably  worth  many  times  what  he 
paid  for  them.  Further,  the  very  considerable  amount 
of  machinery  which  he  uses  has  been  gradually  installed 
in  his  factory  over  a  period  of  years,  and  no  patents  have 
been  taken  out  on  any  of  the  machines.  No  records 
have  been  kept  which  would  make  it  possible  to  esti- 
mate the  actual  cost  of  these  machines.  Finally,  as 
the  business  is  unincorporated,  no  attempt  has  been 
made  to  put  a  value  on  developmental  expenses,  good- 
will, secret  processes,  and  the  like,  which  in  this  case 
are  extremely  valuable. 

The  gross  earnings  of  this  lousiness  in  recent  years 
have  been  as  follows:  1919,  $200,000;  1920,  $185,000; 
1921,  $250,000  (estimated). 

At  this  time  (July,  1921),  Y.  employs  about  eighty 
people,  divided  between  the  instrument  factory  and  the 
publishing  house.  Y.  explains  that  the  depreciation  in 
connection  with  the  publishing  end  of  the  business  is 
extremely  high,  and  that  no  particular  attempt  has 
been  made  to  make  money  out  of  it  directly.  The  aim, 
however,  is  to  publish  and  keep  up  to  date  music 
and  text  books,  for  the  type  of  instruments  manu- 
factured. In  doing  this,  every  effort  is  made  to  secure 
the  services  of  the  highest  authorities  in  the  field.  Even 
though  this  end  of  the  business  has  not  more  than  paid 
for  itself,  Y.  says  that  he  considers  it  a  very  desirable 
thing  for  him  to  engage  in. 

Such  is  the  general  histoi'v  and  present  financial  con- 
dition of  the  ....  Company.  When  the  owner  was 
asked  what  had  been  his  most  difficult  financial  prob- 
lems, he  replied  that  he  could  not  recollect  ever  having 
had  any.  He  said  that  he  had  begun  with  only  a  few 
dollars,  had  paid  all  his  bills  as  he  went,  and  had  been 
extremely  slow  to  expand. 

He  further  states  thai  his  son,  who  has  recently 
graduated  from  a  business  school,  tells  him  that  he  is 
decidedly  a  "back  number"  in  business,  that  he  knows 
nothing  about  accounting  or  financing — a  charge  ad- 
mitted by  the  father — and  that  in  course  of  time  his 


-l()^  PROBLFMS  IN  BUSINESS  FINANCE 

business  will  j)i()bably  fail,  if  it  continues  to  be  con- 
ducted as  at  present.  Y.  is  still  in  his  prime  (age  53), 
but  hopes  to  retire  within  the  next  ten  years.  He 
wishes  \ery  much  to  have  his  son  conduct  the  business 
after  him.  Yet  he  feels  that  the  son  has  no  sympathetic 
understanding  of  the  problems  of  this  business  and  no 
appreciation  of  the  principles  which  ha\e  led  to  what 
Y.  considers  a  reasonable  success. 

At  this  juncture  two  general  questions  are  raised  by 
Mr.  Y.  (a)  What  weaknesses,  if  any,  are  to  be  found 
in  the  financial  conduct  of  his  business?  (b)  What 
steps  should  be  taken  to  insure  continued  prosperitj- 
of  the  business  when  the  present  owner  ceases  to  be  its 
active  administrator? 

Questions 

1.  Was  the  starting  of  the  business  under  the  con- 
ditions outlined,  financially  justified? 

2.  Was  it  a  wise  policy  for  this  concern  to  finance 
itself  solely  out  of  earnings? 

3.  Was  it  financially  justifiable  to  go  into  the  music 
publishing  business? 

4.  Was  Y.  justified  in  refusing  to  expand  rapidly 
during  the  war  period? 

5.  Should  the  machinery  used  be  patented? 

6.  Do  you  approve  of  the  sales  policj'  indicated? 

7.  Do  you  appro\e  of  Y"s  policy  in  refusing  to  give 
figures  to  the  mercantile  agencies,  and  in  avoiding  a 
statement  to  his  bank? 

8.  Was  the  bank  justified  in  lending  this  man  $12,000 
to  put  into  fixed  assets? 

9.  Is  it  financially  desirable  for  this  concern  to  be 
unincorporated? 

10.  What  elements  of  weakness,  if  any,  can  you 
find  in  the  finances  of  this  business? 


GENERAL  PROBLEMS  469 

IL  What  seem  to  you  to  be  the  chief  elements  of 
strength  in  the  financing  of  this  enterprise? 

12.  What  steps,  if  any,  should  you  advise  the  owner 
to  take  in  the  future? 


Problem  225 

I^ROMOTioN,  Expansion,  RECEivERsinp  and  Sale  ok 

Assets  Within  Five  Years 

The  N.  B.  &  F.  Company  making  for  the  most  part 
boiler-room  equipment,  began  business  in  a  small  way 
in  May,  1915,  and  was  incorporated  November  20, 
1915,  with  a  capital  of  $20,000  preferred  stock  and 
$30,000  common.  The  authorized  capital  was  in- 
creased on  April  4,  1917,  to  $100,000  preferred  and 
$100,000  common.  All  the  common  stock  was  held 
bj^  the  three  main  officers  of  the  company. 

The  president  and  general  manager  of  the  company, 
Mr.  N.,  was  thirty-eight  years  of  age,  of  good  character, 
and  reputed  to  be  an  able  inventor.  At  one  time  he 
had  been  associated  w  ith  a  firm  of  machinists  and  was 
in  charge  of  their  shop.  This  firm,  however,  was  not 
successful.  Upon  its  failure  N.  leased  the  plant  and 
continued  to  manufactiu'e  blowers  and  furnaces  in- 
dividually until  he  organized  the  N.  B.  &  F.  Company. 
He  was  not  reputed  to  have  much  capital  of  his  own. 

The  vice-president,  B.,  was  a  widower,  sixty-nine 
years  old,  of  excellent  character.  He  had  earlier  organ- 
ized a  wholesale  provision  and  connnission  house  and 
had  been  president  of  the  .  .  .  Fruit  and  Produce  Ex- 
change.    He  was  sujiposed  to  be  worth  about  $100,000. 


470  PROBLEMS  IN  BUSINESS  FINANCE 

The  treasurer,  M.,  was  forty-nine  years  old  and  had 
been  for  thirty  years  receiving  teller  of  the  Five  Cent 
Savings  Bank.  Pie  was  also  interested  in  a  number  of 
other  propositions,  but  was  not  supposed  to  have  much 
personal  ineans. 

The  following  figures,  taken  from  various  reports, 
show  the  financial  condition  of  the  N.  B.  ^  F.  Com- 
pany at  different  times: 

Condition  shown  in  reports  to  ('oniniissioner  of  Cor- 
porations; 

Total  ^rotal             Net 

Assets  Liabilities      Worth 

March  (),  191()   ..  $100,230      !i?  4S,()00        .501,130 

January  1.  1917 298,28()        150,39S  47,880 

Statkmknt  of  the  N.  B.  &.  F.  Company 
March  31,  1917 

Assets 

Cash    $     2,454.57 

Accounts  receivable  4();370.65 

Stock  on  hand 91,367.43 

Labor  accrued  .  ^     11,274.90 

Machinery 161.473.03 

Equipment  56,493.33 

Furniture  and  Fixtures  4,105.01 

Auto.^  5,591.61 

$379,140.63 

Patents  2,000.00 

Treasury  stock 16,500.00 

Total .1i;397, 640.63 

Ijiabilities 

Accounts  payable ."^108,660.60 

Not3s  payable* .. .     62,659.90 

F.  B 3..^)00.()0 

Advances  on  Pixxluct^..  676.25  .1|;175^496.75 

Excess  of  Assets  over  Liabilities .'$222,143.78 

Represented  by: 

Conunon  Stock   .$20,000.00 

Prefer  ed  Stock ...     .30,000.00 

Depreciation   i'eseiv(>  .  .  .     18,566.54 

Surplus  .  153.477.24 

$222,143.78 


GENERAL  PROBLEMS  471 

At  the  end  of  1917  the  company  is  reported  to  have 
employed  about  3()()  hands.  For  a  period  of  two  j^ears 
the  company's  growth  was  extremely  rapid,  due  largely 
to  war  contracts.  On  May  23,  1918,  they  stated  that 
they  had  been  obliged  to  gi\e  a  chattel  mortgage  to 
the  M.  R.  Com]:any  as  securit}'  for  liabilities  incurred 
on  a  contract  which  they  had  attempted  to  fill  for  the 
Russian  Government.  After  the  entrance  of  the 
L'nited  States  into  the  war,  they  canceled  a  number 
of  their  foreign  contracts  and  entered  into  others  with 
the  United  States  Government. 

A  staten:ent  prepared  by  a  well-known  C.  P.  A.  as 
of  December  31,  1918,  reveals  the  following  condition: 

Statement  of  the  N.  B.  &  F.  Company 
December  31,  19 IS 

Assets 

Cash $40,040 .  92 

Accounts  receivable 270,570.82 

Investments 3,606 .  37 

Stock  on  hand 185.707 .  19 

Machinery 363.139.54 

Equipment 95,804 .  98 

Autos 16,716.11 

Furniture  and  fixtures 7,998.00 

Patents 2,500.00 

Treasury  stock 94,500.00 

$1,088,593.93 

Liabilities 

Accounts  i)ayable $191,518.99 

Mortgage  notes  payal)le 165,236.92 

Machinery  notes  payable 70,491 .61 

Merchandise  notes  payable 57,998.55 

Capital  stock 200,000.00 

Reserve  for  depreciation • 65,250.  74 

Surplus ■ 338,097-22 

$1,0887593.93 

Total  sales  for  1918  were $2,225,092.05 

Total  gain $347,350 .  94 

This  report  showed  appai'ently  large  profits,  but  it 
should  be  borne  in  mind  that  the  business  was  prac- 
tically all  war  business.     There  was  a  large  investment 


472  PROBLEMS  L\  BUSINESS  FINANCE 

in  machinery  covered  hy  chattel  mortgages  to  the 
M.  H.  Company,  and  a  large  amount  held  imder  leases 
from  various  dealers  and  manufacturers. 

In  the  latter  part  of  1919,  the  X.  B.  ct  F.  Company 
began  to  have  serious  financial  difficulties.  The}' 
could  not  secure  cash  to  pay  their  creditors.  It  was 
apparent  that  some  other  work  beside  war  work  would 
be  necessary  to  keep  the  plant  busy.  The  compan}- 
accordingly  began  to  manufacture  a  special  make  of 
tractor  which  was  the  pet  project  of  the  president  of 
the  concern.  The  company  having  had  no  previous 
experience  in  this  line  of  work  found  it  necessary  to 
invest  heavily  in  new  equipment  in  order  to  turn  (uit 
the  tractors.  A  statement  filed  August  25,  1919,  pur- 
ports to  show  the  following  condition: 

Statement  of  the  N.  B.  &  F.  Company 
August  25,  1919 

Assets 

Machinery $418,407 .  89 

Manufacturing  stock  and  materials 185,707. 19 

Cash  and  debts  receivable 831,443.39 

Patents 2,500.00 

Investments 82,565.12 

$1,520,623.59 

Liabilities 

Capital  stock $105,500 .  00 

Accounts  pavable 181,518 .  99 

Funded  debt 159,255 .  14 

Floating  del)t 663,322 .  19 

Surplus 331,027.27 

Contingent  lia'  iiies  .  . 80,000.00 

$1,520,623.59 

At  this  time,  four  mercantile  creditors  reported  that 
they  found  the  company  from  one  to  four  months  slow 
and  that  they  did  not  consider  their  account  satis- 
factory. 

On  September  23.  1919.  proceedings  were  filed  in  a 
bill  of  equity  in  the  United  States  District  Court  for 
the  appointment  of  a  receiver.  At  this  time  there  was 
apparently  an  excess  of  assets  over  liabilities  amounting 


GENERAL  PROBLEMS  473 

to  several  hundred  thousand  dollai's.  Accordingly,  on 
September  26,  1919,  the  judge  appointed  Mr.  C.  as  the 
receiver,  under  bond  of  SoO.OOO.  JNIr.  C.  was  a  member 
of  an  old-established  firm  of  machinery  dealers.  He 
was  about  forty  yeai's  of  age  and  a  son  of  the  founder 
of  his  firm.  Though  he  had  an  excellent  reputation, 
he  had  never  had  any  factory  experience. 

On  the  day  of  his  appointment  as  receiver,  C.  was 
authorized  by  the  court  to  sell  $200,000  in  receiver's 
certificates  at  an  interest  rate  not  exceeding  7  per  cent. 
On  January  10,  1920,  he  was  authorized  to  sell  $50,000 
additional.  These  certificates  were  all  purchased  by  the 
.  .  .  National  Bank.  The  receiver  retained  N.,  the 
former  president  and  manager,  with  him  in  the  business. 

During  the  next  year  the  receiver's  chief  aim 
seems  to  have  been  to  keep  the  plant  in  operation. 
He  accordingly  proceeded  to  finish  up  the  war 
contracts  on  hand.  He  is  said  to  have  employed  a 
practical  factory  manager  formerly  with  the  .  .  .  Arms 
Company  and  to  have  secured  outside  advice  and  ap- 
proval on  all  important  contracts.  He  also  con- 
tinued to  manufacture  the  N.  Tractor,  the  making  of 
which  was  already  under  wa.y.  These  tractors  proved 
defective,  however,  and  this  part  of  the  business  turned 
out  to  be  a  heavy  loss  to  the  company.  The  receiver 
further  made  contracts  with  different  concerns  for  ma- 
chinery parts  for  certain  appliances,  which  also  porved 
to  be  unsatisfactory.  Not  the  least  of  his  operations 
was  said  to  be  the  production  of  certain  accessories, 
to  be  sold  to  his  own  company,  the  making  of  which 
required  the  installation  of  a  good  deal  of  new 
equipment. 

Some  time  after  the  appointment  of  the  receiver,  a 
reputable  firm  of  accountants  was  employed  to  report 
on  the  financial  condition  of  the  N.  B.  &  F.  Company. 
However,  the  accounts  were  so  confused  that  it  took 
three  months  for  the  accountants  to  make  their  report. 
Their  preliminar}^  report  showed  that  the  assets  had 
been  greatl}^  overvalued.  The  definitive  report  filed 
July  31,  1920,  showed  the  following  condition: 


474  PROBLEMS  IN  BUSINESS  FINANCE 

Statkmknt  of   the  X.  B.  tV:   F.  Company 
•Inly  81.  1920 

Assets 

InveiUui  y $328,C0O 

Accounts  receivable 105,000 

Cash 2,500 

Investment  in  affiliated  companies 54,000 

Machinery,  eciuipnient,  etc 472,000 

Tools,  patterns,  patents,  etc 204,000 

Total $1,165,500 

Ijiabilities. 

Receiver  a  Liabilities -1552  000 

Receiver's  Certificates  payable  to  S.B.  Co.    $250,000 
Receiver's  Certificates  pavable  for  mer- 
chandise   ■ 233,000 

Other  payables  and  accruals 69.000 

Secured  Loans 508,000 

Mortjia^es  notes  payable 1 13,000 

Machinery  lease  notes 56,000 

Manuacturers'  Finance  Corporation.      .         76,000 

Blank  Tiust  Companv 68,000 

Blank  Bank 195,000 

Unsecured  Obligations 509. OCO 

Accounts  pavable  .  .  .^ 304,000 

Notes  pavable 107,000 

Taxes,  accruals,  etc 98,000 

Total  Liabilities $1,569,000 

Excess  Liabilities 430,500 

The  receiver  gave  out  no  statement  of  his  operations 
before  July  31,  1920.  Shortly  after  this  date  the  fol- 
lowing information  was  given: 

Receipts  and  Disbursements  of  the  N.  B.  &  F.  Company 
Under  the  Receivership  from  September  26,  1919, 
to  July  31,   1920. 

Receipts $832,000 

From  current  sale  of  product $490,000 

From  loans 266,000 

From  collections 27,000 

From  miscellaneous 49,000 

Disbursements $835,0C0 

For  wages  and  salaries 559,000 

For  materials,  supplies,  etc 213,000 

For  miscellaneous 63,000 


GENERAL  PROBLEMS  475 

By  this  time  the  new  creditors,  wh(3  naturally  con- 
sidered themselves  secui'ed  under  the  receivership,  were 
growing  extremely  restless,  as  it  was  not  possible  for 
them  to  obtain  payment  of  their  bills,  and  checks  of 
the  N.  B.  &  F.  Company  were  being  dishonored. 

On  August  27,  1920,  F.  &  A.,  attorneys  for  the  P.  G. 
Company,  filed  a  petition  to  have  the  receiver  removed, 
claiming  mismanagement  and  failure  to  render  proper 
accounts.  It  is  understood,  however,  that  such  a 
bitter  attack  was  made  that  the  court  did  not  feel 
justified  in  removing  the  receiver,  but  did  appoint  as 
co-receiver  a  lawyer  of  high  standing. 

On  October  28,  1920,  without  bankruptcy  proceed- 
ings, the  failure  being  so  obvious,  the  Court  authorized 
the  receivers  to  sell  the  property  at  public  auction,  in 
order  to  satisfy  the  outstanding  claims.  This  auction 
took  place  on  November  17,  18,  19,  and  20,  1920,  and 
the  amount  realized  from  the  sale  was  $259,606.73. 
The  details  of  the  sale  and  apportionment  of  the  pro- 
ceeds were  gradually  woi'ked  out  and  submitted  to  the 
Court  on  June  1,  1921,  within  two  weeks  after  which 
tin:e  a  hearing  of  the  creditors  was  to  be  held.  An 
advance  survey  of  the  report  to  be  presented  to  the 
creditors  at  that  time  is  given  as  follows  by  one  of  the 
largest  creditors: 

Creditors'  Claims   o.\   the   N.   B.   ct    F.   Coj^panv 

Arranged  as  Nearly  as  May  Be  in  Order 

OF  Priority 

1.  Leased  Machinery.  As  previously  stated,  a  lar^e 
amount  of  inaehiiieiy  was' held  on  leases  which  were  paitly 
paid  for.  Whatevei'  was  received  fi'oni  the  sale  in  excess 
of  these  leases  went  to  the  receivers.  If  the  property  sold 
for  less  than  the  aniornt  of  the  leases,  the  owner  would  lore 
the  diffei'ence.  The  total  anour.t  realized  from  the  i-ale 
of  the  leased  machin;My  was  -liiSli ,425.62.  Of  this  amount  it 
required  .'$53,934.24  to  clear  the  leases.  From  the  differ- 
ence a  proportionate  share  of  the  expenses  of  the  sale  must 
he  deducted. 

2.  Chattel  Mort  jacje.  As  already  indicated,  a  large 
amount  of  the  machinery  was  secured  hy  chattel  mortgnges 
from  the  M.  R.  Company.  Th(>  machinery  so  covered  was 
valued  at  approximat  >ly  .SJOO,!!!)!'.     Fiom  the  sale  of  this 


47ti  PROBLEMS  IX   lUSINESS  FINANCE 

inoi'tgafitHl  iiiacliiin'iy  ^^01, ()()()  was  i-calizcd,  fiom  whifli 
inu.>«t  also  lie  paid  ;i  piopoi  t  ioiiatc  share  of  the  cost  of  the 
salo. 

'.\.  Ki;.Ni'  lv\i'i:\si;s  i  Lndt-r  Spcciid  Judfiiucnt.)  On 
Eebruary  11.  1921,  the  Court  issued  a  special  decree  giving 
preference  for  the  (•ha!'ji"(>  for  i-ent  amounting  to  appioxi- 
mately  $21. ()()(). 

4.  Expk.\sp:s  of  the  Sali:.  The  ex])enses  of  the  sale 
will  be  approximately  $26,000,  o!"  which  SI 4, 000  will  cover 
actual  outlays  for  assistance  of  various  sorts.  The  auc- 
tioneer will  also  probably  claim  about  $12,(100  foi-  his  own 
services,  extending  over  a  considerable  period  both  befoj-e 
and  after  tlu^  sale.  This  claim  must  be  appioved  by  the 
Couit . 

5.  Accrued  Pay-Roll.  At  the  time  of  the  sale  there 
w^as  an  accrued  paj^-roll  amounting  to  about  $16,000. 

6.  Manufacturer's  Finance  Corporation.  This  cor- 
poration has  a  secured  claim  of  $26,000.  but  the  total  amount 
of  their  claim  is  $76,000.  They  wi  1  fight  for  the  full  amount 
on  the  basis  of  their  agreement  with  the  N.  B.  &  F.  Com- 
pan}''  which  covered  all  subsequent  loans.  This  claim  must 
be  settled  by  the  Court,  and  so  far  as  the  total  amount  is 
concerned  the  results  are  doubtful. 

7.  Receiver's  Claims  (Following  the  Order  of  Sate.) 
The  amount  of  these  claims  is  not  known.  However,  it 
w411  probably  be  from  $15,000  to  $25,000  depending  on  the 
judgment  of  the  Court. 

8.  Receiver's  Claim  (Preceding  the  Order  of  Sale.) 
The  amount  of  this  claim  is  not  yet  known.  It  may  be  con- 
tested that  the  receiver  is  not  entitled  to  any  compensation 
on  account  of  negligence,  and  the  creditors  (headed  presum- 
ably by  attorneys  F.  &.  A.)  may  al.^o  endeavor  to  secure  the 
foi'feiture  of  the  receiver's  bord  of  i'*;50,C('.().  1  he  Court  is 
apparently  friendly  to  the  receiver  and  it  is  doubted  whether 
anything  will  come  of  this  action,  sinc(>  attoi'iiey  A.,  though 
a  responsil)le  man,  is  rather  hot  headed  and  inclined  to  raise 
ill  feeling. 

9.  Receiver's  Certificates.  Aftei'  the  receiver's  ex- 
penses are  paid,  or  disallowed,  w^ill  logically  come  the  claim 
of  the  .  .  .  National  Bank  for  $250,000  'oaned  on  Receiver's 
Certificates.  In  case  there  should  be  no  propert.y  left  to 
meet  this  claim,  however,  there  is  a  very  real  question  as 
to  whether  the  claims  of  the  receiver's  creditors  may  not  be 
placed  on  an  equality  with  those  of  the  bank.  1  he  argu- 
ment is  made  that  there  is  no  justification  foi'  preference. 


GENERAL  PROBLEMS  477 

10.  1{kci:i\  kk's  Ckkdi  lOKS.  After  1  he  Receiver's  (Certifi- 
cates (or  on  a  par  witii  them),  will  come  the  claim  of  the 
Receiver's  Creditoi's.  It  is  understood  that  these  claims 
will  total  from  .'^1()0,()()0  to  $IS(),()()().  Of  these  the  larf^est 
is  pi-oljal)ly  that  of  the  A.  L.  L-on  A\'oiks  ainountinjj;  to  more 
than  .1i;3(),()()0,  followed  by  that  of  the  Blank  Fomidry  Com- 
pany (amount  not  known),  and  hy  the  O.  A:  F.  Company, 
of  which  the  receiver,  Mr.  C...is  an  officei-,  amounting  to 
possibly  $10,000  or  $12,000. 

11.  LTnsecured  (^laims.  Followiiiji  all  these  claims 
would  co'.ne  the  unsecured  claims  of  creditors  of  the  com- 
pany foi"  debts  incurred  t)efore  the  receiver  was  appointed. 
These  claims  do  not  chanj^e  a[)preciably  from  the  condi- 
tion shown  in  the  statement  on  .July  ;^>l,  1920. 

Questions 

1.  Summarize  under  appropriate  heads  the  definite 
conclusions  which  can  be  drawn  from  the  foregoing  prob- 
lem regarding  the  sound  principles  of  Industrial  Finance. 

2.  What  special  conclusions,  if  any,  do  you  draw 
regarding  the  financing  of  this  concern  under  its 
receivership? 

3.  What  light,  if  any,  does  the  problem  throw  on 
the  question  of  granting  mercantile  credit  to  a  concern 
which  is  in  a  receiver's  hands? 

4.  As  the  president  of  the  A.  L.  Iron  Works  Com- 
pany would  you  have  sold  goods  on  credit  to  the  N.  B. 
&  F.  Company? 

5.  WTiat  steps,  if  any,  should  you  advise  taking  at 
this  time  by  the  A.  L.  Iron  Works  Company,  the  chief 
mercantile  creditor  under  the  receivership? 

(5.  As  the  situation  has  been  presented,  granted  that 
no  legal  action  is  taken  b\^  the  receiver's  creditors, 
imder  the  most  favorable  conditions  what  dividend 
can  the  A.  L.  Iron  Works  hope  to  receive  on  its  claims? 

7.  Assuming  that  you  had  been  the  president  and 
manager  of  this  concern,  what  steps,  if  any,  would  you 
have  taken  to  avoid  the  conditions  which  led  to  the 
receivership  in  1919? 

8.  Assuming  that  you  had  been  appointed  receiver 
of  the  N.  B.  &  F.  Company,  what  definite  steps  would 
3-ou  have  taken  to  save  the  company? 


-178  PROBLEMS  IN  BUSINESS  FINANCE 

I'komi.k.m   '■i'2(» 

TlIK     Fl.\A.\<I\L     PHOMLKMS     OK     A     SmALL,     XkWLY 

()h(;a\i/,i:i)  Rf->"hi(;i;hat()I{  Company 

Mr.  X.  is  the  hij^hly  efficient  district  sales  manager 
for  the  East  North  Central  States  of  one  of  the  largest 
refrigerator  companies  in  the  United  States,  He  has 
a  thorough  knowledge  of  the  j)rodiiction  and  the  selling 
end  of  the  refrigerator  business.  The  company  which 
he  represents  makes  only  standard  sizes  and  styles  of 
refrigerators  in  lar^e  numbers,  and  has  continually 
refused  to  accept  any  orders  calling  for  special  con- 
struction, on  the  ground  that  it  is  more  profitable  for 
them  to  depend  for  their  profits  on  mass  production. 

Mr.  X.,  howe\'er,  discovered  that  it  was  necessary, 
because  of  his  company's  policy,  for  him  to  turn  away 
on  the  average  several  thousand  dollars'  worth  of  busi- 
ness per  month.  Accordingl}-,  he  decided  that  it 
would  be  a  worth-while  experiment  to  do  a  little  manu- 
facturing himself,  in  order  to  fill  some  of  the  special 
orders  which  he  was  forced  to  turn  away  from  his  own 
company.  He  reasoned  that  so  long  as  he  did  not 
take  away  customers  from  the  concern  which  employed 
him,  it  would  be  a  perfectly  ethical  thing  for  him  to  do, 
though  he  did  not  at  present  wish  the  fact  to  be  known 
by  his  employers.  Nor  did  he  have  at  this  time  more 
than  a  few  hundred  dollars'  capital  to  put  into  the  new 
venture. 

In  accordance  with  the  policy  which  Mr.  X.  had 
decided  upon,  he  took  a  few  orders  in  the  spring  of 
1920,  and  hired  a  firm  of  carpenters,  skilled  in  the  art 
of  making  refrigerators,  to  do  the  work.  As  he  re- 
c^uired  a  large  deposit  when  each  order  was  accepted, 
he  managed  to  finance  the  operations  for  a  few  months 
in  this  way. 

Orders  began  to  come  in  rapidly  by  July,  1920,  and 
it  soon  became  evident  that  if  this  ''side  line"  of  Mr. 
X's  was  to  be  continued,  he  must  have  a  more  definite 
organization  for  carrying  on  the  work.  Yet  it  was  also 
apparent  that  his  position  would  be  in  danger  if  his 
identity  should  be  disclosed  in  this  connection  before  his 


GENERAL  PROBLEMS  479 

side  line  had  become  sufficiently  important  to  demand 
all  of  his  attention. 

Consequentl^y  a  plan  was  worked  out  for  incorporat- 
ing the  company  in  order  to  conduct  the  business  more 
effectively.  A  president  and  a  treasurer  were  found, 
who  were  willing  to  put  a  little  money  into  the  busi- 
ness and  to  act  more  or  less  as  "silent  partners." 
Mr.  X.  himself  also  put  in  a  few  hundred  dollars.  No 
real  estate  was  purchased,  but  the  services  of  the  firm 
of  carpenters  were  secured  to  carry  on  the  manufacture 
of  refrigerators  by  allowing  them  $2,000  in  cash  for 
their  work  already  in  process  and  the  goodwill  of 
their  business.  They  accordingly  became  employees 
of  the  new  concern.  In  all,  including  the  amount  paid 
for  this  goodwill,  not  more  than  $3,500  in  cash  was 
originally  put  into  the  business.  Capital  stock  was 
issued  as  follows: 

500  shares  of  preferred,  with  a  par  value  of  $50. 
500  shares  of  no  pai'  value  common. 

The  common  stock  carried  all  the  voting  power,  and 
the  majority  control  was  given  to  Air.  X.  as  the  active 
promoter  of  the  organization.  A  very  little  of  the 
preferred  stock  was  sold  to  outsiders.  Another  small 
portion  was  taken  and  paid  for  by  the  officers  above 
mentioned,  while  the  remaining  |)ortion  was  donated 
and  deposited  as  "treasui'v  stock,"  and  was  carried 
on  the  asset  side  of  the  balance  sheet. 

As  the  months  went  on,  business  was  turned  to  this 
new  concern  by  Mr.  A,  though  he  was  always  careful 
not  to  reveal  his  own  connection  with  the  new  company. 
Finally,  he  concei\'ed  an  additional  project,  which,  as 
he  thought,  might  eventually  make  his  company  a 
great  success.  Realizing  from  his  former  experience 
that  the  butcher,  for  example,  is  desirous  of  jilacing 
with  the  same  concern  an  order  for  some  of  the  other 
general  equipment  needed  in  addition  to  i-efrigerators, 
such  as  scales,  meat  cutters,  meat  blocks,  and  the  Uke, 
he  decided  to  act  as  a  jobber  for  these  appliances,  and 
so  add  a  profitable  side  line  to  his  i-efrigerator  business. 


4S()  FHOBLEMS  IX  BUSINESS  FINANCE 

There  is  a  \qy\  wide  margin  between  the  purchase 
price  and  the  seUing  price  of  such  goods,  and  no  added 
salary  expenses  were  incurred  by  this  policy. 

In  the  meantime,  Mr.  X.,  who  has  little  knowledge 
of  accounting  and  finance,  was  endeavoring  to  keep  the 
books  of  his  concern  and  to  exercise  general  supervision 
after  his  day's  work  was  done  for  the  company  which 
employed  him.  By  February,  1921,  however,  his 
affairs  were  in  such  a  condition  that  he  decided  to 
engage  the  services  of  a  new  accountant,  who  would 
also  act  as  "assistant  treasurer,"  to  help  in  straighten- 
ing out  his  finances.  The  first  balance  sheet  drawn  up 
showed  the  following  condition : 

Statemf:nt  of   .    .    .    Refrigerator  Company 
February  1,  1921 
Assets 

Machiner}^  equipment,  etc $2,000 

Inventor}^: 

Raw  material 1,000 

In  process 1,500 

Receivables: 

Accounts 2,000 

Notes 2,500 

Cash 500 

Goodwill 7,000 

Treasury  stock 14,000 

$30,500 
Liabilities 
Capital  Stock: 

Preferred  (par  val.  $50) $25,000 

Common,  500  shares  (no  par  value)  500 

Accounts  payable 5,000 

$30,500 

At  this  point  it  should  be  explained  that  it  was  now 
the  usual  practice  of  the  .  .  .  Company  to  require 
25  per  cent  cash  with  all  orders,  25  per  cent  more 
C.  O.  D.,  and  the  balance  over  a  six  months'  period, 
covered  by  notes  due  each  month  for  one-sixth  of  the 
amount  unpaid  at  the  time  of  delivery  (50  per  cent 
of  the  selling  price).  These  terms  are  common  in 
the   "trade."     But   the    terms    granted    to    the    com- 


GENERAL  PROBLEMS  481 

pany  when  purchasing  materials  were  as  a  rule  not 
more  than  sixty  days  net,  and  they  were  never 
able  to  take  their  cash  discounts  because  of  their 
lack  of  working  capital.  In  fact,  they  were  rarely  able 
to  pay  their  bills  at  the  expiration  of  the  net  period. 
They  usually  tried  to  put  off  their  smaller  creditors  on 
the  ground  that  their  financial  position  would  soon  be 
more  satisfactory,  and  that  they  would  then  pay  cash 
for  their  orders.  C'Onse(iuently,  this  concern,  while 
giving  long  term,  did  not  itself  secure  any  of  the  ad- 
vantages in  purchasing  which  come  from  prompt  pay- 
ments and  an  abundant  supply  of  working  capital,  nor 
was  it  possible  at  this  time  to  bori'ow  any  money  from 
the  local  banks,  because  of  the  extremely  unsatisfactory 
current  position.  It  should  further  be  explained  that 
long  terms  were  also  given  to  the  customers  who  bought 
the  accessories  carried  as  a  side  line,  though  in  this 
case  again  the  credit  terms  to  the  .  .  .  Company  were 
much  shorter. 

One  salesman  was  now  put  on  the  road  on  a  com- 
mission basis,  ranging  from  5  per  cent  to  10  per  cent, 
depending  upon  the  articles  sold.  Orders  began  to  come 
in  rapidly  within  the  next  two  or  three  months,  until  by 
spring  the  company  was  almost  literally  swamped  with 
work  which  there  was  no  possibility  of  completing  for 
several  months.  The  management,  however,  was. dis- 
posed to  encourage  these  orders,  because  a  certain 
amount  of  cash  was  received  with  each  order — and 
more  cash  was  absolutely  necessary  for  the  business  if 
it  was  to  continue. 

Practically  every  expedient  had  been  tried  in  order  to 
secure  and  conserve  working  cajiital.  For  example, 
neither  the  president  iior  the  ti'easurei"  I'eceived  any 
salary,  and  the  "assistant  treasurer  and  accountant," 
while  nominally  receiving  a  small  salary,  had  drawn  out 
practically  nothing.  Part  of  the  salesman's  connnissions 
were  not  for  the  i)resent  being  i)aid.  Fui'ther,  though 
an  excellent  trade-mark  had  been  devised,  it  had  not 
been  registered  because  of  the  expense  which  would 
thereby  be  incurred.     Some  difficulty  had  always  been 


482  PROBLEMS  IN  BUSINESS  FINANCE 

experienced  in  meeting  tlie  absolutely  necessary  pay- 
roll, and  frequently  checks  were  "kited"  by  the  officers 
between  diffei'ent  local  banks,  with  a  view  to  securing 
temporary  funds  before  demands  were  made  by  cred- 
itors. Frequently,  also,  Mr.  X.  drew  on  his  personal 
account  in  order  to  pay  the  weekly  bills. 

By  the  end  of  March,  an  officer  of  the  concern, 
through  an  influential  friend  who  was  well  known  to 
one  of  the  banks  in  an  adjoining  town,  managed  to 
arrange  for  the  discount  of  son:e  of  the  customers' 
notes  held  by  the  .  .  .  Company.  This  arrangement 
brought  only  temporary  relief. 

In  April,  1921,  the  financial  statement  submitted  to 
the  State  Tax  Commissioner  was  as  follows: 

Statement  of  ...    .  Refrigkr.a.tor  Co  . 
April  1,  1921. 

Assets 

Machinery,  equipment,  etc $2,500 

Inventory: 

Raw  material 2,000 

In  process 3,000 

Notes  receivable 3,000 

Cash 1,000 

Goodwill 7,000 

Treasury  stock 13,500 

$32,000 

Liabilitios 
Capital  Stock: 

Preferred  (par  val.  $50) $25,000 

Common,  500  shares  (no  par  valiuO  500 

Accounts  payable 4,325 

Deposits   due   to   customers   on   ac- 
count of  unfilled  oi'ders 2,000 

Surplus 175 

$32,000 

The  accountant  also  discovered  that  the  volume  of 
business  since  the  organization  of  the  company  in 
July,  1920,  had  been  about  $50,000,  and  that  the  sales 
were  rapidlj^  increasing.  In  fact,  during  the  next 
month  of  April,  $10,000  worth  of  goods  were  sold. 
The  terms  of  sale  were  at  this  time  made  somewhat 


GENERAL  PROBLEMS  483 

more  flexible,  much  business  being  done  for  cash  and 
some  on  open  account.  By  May  15th,  the  Company 
was  discounting  $2,500  of  its  notes  receivable,  and  the 
financial  condition,  as  given  by  the  treasurer,  was  as 
follows : 

Statement  of  ....    Refrigerator  Company 
May  15,  1921 

Assets 

Machinery,  equipment,  etc $3,000 

Inventory : 

Raw  material 2,300 

In  process 2,800 

Finished  goods* 2,600 

Notes  receivable : 

Under  6  months 2,500 

Over  6  months 1,200 

Accounts  receivable 4,800 

Cash 600 

Treasury  stock 14,100 

Goodwill 1,000 

$34,900 
*  Mostly  samples  of  side  lines  for  display  purposes. 

Liabilities. 
Capital  Stock: 

Preferred  (par  val.  $50) $25,000 

Common,  500  shares  (no  par  value)  500 

Accounts  paya})le 5,000 

Due  to  customers 1,000 

Liability  for  notes  discounted 2,500 

Surplus 900 

$34,900 

On  the  strength  of  the  above  statement  a  loan  of 
$1,000  was  now  secured  from  the  local  b^ink.  All  of 
the  short-time  notes  receivable  were  also  being  dis- 
counted by  several  small  banks. 

Mr  X.  is  becoming  more  and  more  enthusiastic 
about  his  little  company  as  the  orders  are  rolling  in, 
and  he  is  now  spending  most  of  his  nights  on  his  pet 
project,  though  still  retaining  his  position  as  sales 
manager  for  the  .  .  .  Refrigerator  Company,  in  which 
he  gives  entire  satisfaction.     He  is  making  all  possible 


4S4  PROBLEMS  IN  BUSINESS  FINANCE 

sacrifices  and  feels  that  he  has  a  proposition  which  will 
ultimately  bring  him  a  fortune.  His  wife  is  also  much 
interested  in  her  husband's  new  company,  but  is 
naturally  extravagant,  and  it  has  not  been  possil^le  for 
Mr.  X.  to  put  into  the  company  any  considerable 
amount  of  the  earnings  received  from  his  present 
position.  After  October,  Air.  X.  plans  to  devote  all  of 
his  time  to  the  new  business.     (He  is  still  under  forty.) 

Questions 

1.  Do  you  approve  of  launching  a  new  enterprise 
under  the  conditions  above  outlined? 

2.  Could  you  suggest  any  better  method  of  financing 
the  business  in  the  beginning? 

3.  Do  you  think  it  was  financially  desirable  for  the 
company  to  take  on  the  "side  lines"  mentioned? 

4.  Analyze  the  elements  of  weakness  which  you 
believe  are  shown  by  the  balance  sheets  submitted. 
What  important  changes,  if  any,  took  place  between 
the  various  dates?     Explain  any  unusual  item. 

5.  Do  you  approve  (a)  of  the  selling  and  (6)  of  the 
purchasing  policy  of  the  concern? 

6.  (a)  As  an  actual,  (b)  as  a  prospective  mercan- 
tile creditor,  what  would  be  your  attitude  toward 
this  concern? 

7.  Are  the  banks  well  ad\ised  in  discounting  the 
customers'  notes  of  this  concern?  Should  an  un- 
secured loan  have  been  made'.^ 

8.  What  steps,  if  any,  would  you  advise  taking  in 
order  to  secure  more  adequate  working  capital? 

9.  What  do  you  expect  to  be  the  future  of  this 
company  under  present  management? 

10.  Assuming  that  you  should  have  an  opportunity 
to  buy  out  the  concern,  and  were  willing  to  do  so, 

(a)  How  much  would  you  be  disposed  to  pay  and 

(b)  How,   if  at  all,   would  you  reorganize  its 
finances? 


STATISTICAL  APPENDIX 


STATISTICAL  APPENDIX 

THE  following  Tables  of  Statistics  are  in  the  main  arranged 
so  as  to  parallel  the  various  chapters  in  the  text.  In  some 
of  them  have  been  incorporated  significant  data  here  worked 
out  for  the  first  time.  Others  contain  material  which  has  been 
published,  but  not  widely  circulated.  It  is  hoped  that  the 
material  here  listed  may  prove  of  considerable  value  to  the  stu- 
dent and  general  reader  in  connection  with  the  preceding  problems. 

I.  Number  and  Size  of 
Industrial  Concerns  in  the  United  States 

The  following  summary  tables,  based  on  the  Census  of  Manufac- 
tures for  1914,  show  the  general  development  of  business  concerns 
over  a  fifteen-year  period : 


A.     Manufacturixg 

Industries  in  the  United  States* 

Item 

1914 

1909 

1904 

1899 

Number  of 

establishments 

275,791 

268,491 

216,180 

207,514 

Persons  engaged . 

8,263,153 

7,678,578 

6,213,612 

(ij 

Proprietors  and 

firm  members 

262,599 

273,265 

225,673 

(1) 

Salaried  em- 

ployees   

964,217 

790,267 

519,556 

364,120 

Wage  earners 

(average  No.)- 

7,036,337 

6,615,046 

5,468,383 

4,712,763 

Primary  horse- 

power   

22,547,574 

18,675,376 

13,487,707 

10,097,893 

Capital 

$22,790,979,937 

$18,428,269,706 

$12,675,580,874 

$8,975,256,496 

Salaries  and  wages 

$5,366,249,384 

$4,365,612,851 

$3,184,884,275 

$2,389,132,440 

Salaries 

1,287,916,951 

938,574,967 

574,439,322 

380,771,321 

Wages 

4,078,332,433 

3,427,037,884 

2,610,444,953 

2,008,361,119 

Paid  for  contract 

work 

$198,876,826 

$178,645,635 

$145,322,516 

(1) 

Rent    and    taxes 

(including     in- 

ternal revenue) 

$582,039,665 

$457,883,110 

(2)  $131,964,825 

(1) 

Cost  of  materials. 

$14,368,088,831 

$12,142,790,878 

$8,500,207,810 

$6,575,851,491 

Value  of  products 

$24,246,434,724 

$20,672,051,870 

$14,793,902,563 

$11,406,926,701 

Value    added   by 

manufacture 

(value  of  prod- 

ucts less  cost  of 

materials) 

$9,878,345,893 

$8,529,260,992 

$6,293,694,753 

$4,831,076,210 

(1)     Figures  not  available. 
♦Preliminary  figures  for  1919  put  the  Number  of 
Product  amounting  to  $(52,588,905,000. 

487 


(2)     Exclu.sive  of  internal  revenue. 
Establishments  at  288,376,  with  a  total  Value  of 


488 


PROBLEMS  IN  BUSINESS  FINANCE 


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1 

STATISTICAL  APPENDIX 


489 


II.   Analysis  op  the  Balance  Sheets  of  Leading  Industrial 
Concerns  for  the  Year  1918 

An  analysis  of  the  combined  balance  sheets  of  more  than  fifty  of 
the  leading  industrial  concerns  of  the  United  States  for  the  year  1918, 
made  by  a  well-known  investment  house,  shows  the  following  inter- 
esting relationships : 

Combined  Balan'ce  Sheet  of  57  Leading  Industrials 
FOR  THE  Year  1918 


Assets 

Cash $    251,601,600 

Receivables 547,318,307 

Inventories 988,340,287 

Securities  and  other  investments 429,952,082 

Deferred  or  prepaid  accounts 55,101,574 

Plant  account.  Tangibles 1,938,819,088 

Plant  acco'int.  Intangibles 430,154,474 

$4,641,287,412 

Liabilities 

Common  stock $1,279,074,519 

Preferred  stock 971,365,327 

Bonds 500,114,093 

Notes  payable 206,941,018 

Accounts  payable 409,870,973 

Accrued  taxes,  dividends  and  interest 47,844,797 

Reserves 347,171,940 

Special  obhgations 38,150,932 

Surplus _3^A^M13 

$4,641,287,412 


27.56 

20.93 

10.78 

4.46 

S.83 

1.03 

7.48 

.82 

18.11 

100. 


1.     Statement  of  Net  Quick  and  Total  Net  Assets 

Per  Gent  of 

Current  Assets  Current  Assets 

Cash $    251,601,600  1135 

Receivables 547,318,307  24. 68 

Inventories 988,340,287  44 .  58 

Securities  and  Other  Investments 429,952,082  19.39 

Total  Current  Assets $2,217,212,276  100. 


Current  Liabilities  , 

Notespayable $206,941,018 

Accounts  payable 409,870,973 

Accrued  Accounts 47,844,797 

Reserves 385,322,872 

Total  Current  Liabilities $1^049,979,660 


Per  cent  of 

Current 

Liabilities 

19.71 

39.03 

4.56 

36.70 


100. 


490  PROBLEMS  IN  BUSINESS  FINANCE 

Per  Cent  of 

Total 
Net  Assets 

Net  Quick  Assets 11,167,232,616  36.9 

Deferred  and  Prepaid 55,101,574  1 . 8 

Plant  Account, Tangibles 1,938,819,088  61.3 

Total  Net  Assets $3,161,153,278  100. 

Represented  by : 

Bonds $    500,114,093 

Preferred  Stocks 971,365,327 

Common  Stocks 1,279,074,519 

Surplus  (Less  Intangibles) 410,599,339 

S3,161,153,-278 

Ratio  of  Net  Quick  Assets  to  Preferred  Stock  and  Bonds 79 

Ratio  of  Total  Net  Assets  to  Preferred  Stock  and  Bonds 2. 15 

Total  net  earnings  (after  depreciation  and  taxes) $324,378,143 

Per  cent  on  capital 10.97% 

Relation  of  preferred  stock  to  common  stock 75.9  % 

Relation  of  bonds  to  common  stock 39. 1  % 


2.     Relation  of  Working  Capital  to  Gross  Sales 

An  analysis  of  the  balance  sheets  and  income  accounts  of  37  large 
industrial  concerns  shows  the  following  interesting  relations : 

Working  Capital  (Net  Quick  Assets)  $1,625,243,713 

Gross  Sales $7,150,943,372 

Turnover  of  Working  Capital 4.4  times 


STATISTICAL  APPENDIX 


491 


III.  Statement  of  the  Capital  and  Financial  Results  uv  Opera- 
tion OF  More  than  250  Important  Industrial 
Companies  for  Each  Fiscal  Year 
(in  Millions  of  Dollars) 

A  study  of  more  than  250  of  the  leading  industrial  companies,  for 
the  period  1911-1918  inclusive,  classified  in  the  following  manner — 

A.  Farm  and  household  supplies 

B.  Industrial  material  and  equipment 

shows  the  following  significant  relationships* : 

A.     Farm  and  Household  Supplies 


Item 

1911 

1912 

1913 

1914 

1915 

1916 

1917 

1918 

1.  Total  Assets 

$2,252 

$2,759 

$3,218 

$3,416 

$3,668 

$4,398 

$5,251 

$5,278 

2.  Total  Liabilities 

(Excl.  funded  debt) 

288 

374 

484 

528 

544 

699 

1,152 

1,389 

3.  Net  Worth 

1,964 

2,385 

2,734 

2,888 

3,124 

3,699 

4,099 

3,889 

4.  Funded  Debt 

313 

280 

323 

339 

350 

392 

383 

407 

5.  Capital  Stock 

1,317 

1,646 

1,892 

1,964 

2,067 

2,382 

2,499 

2,349 

6.  Net  Income 

144 

189 

227 

203 

284 

488 

522 

371 

7.  Interest    paid   on 

funded  debt 

15 

14 

17 

17 

18 

20 

20 

18 

8.  Amount  Earned  for 

Capital  Stock .... 

128 

175 

211 

186 

265 

468 

502 

353 

9.  Dividends    paid    on 

Capital  Stock .... 

73 

101 

192 

135 

150 

200 

193 

169 

10.  Rate    of    Return 

Earned  (per  cent) : 

On  Net  Worth.. 

7.38 

7.93 

8.30 

7.03 

9.08 

13.20 

12.98 

9.53 

On  Capital  Stock 

9.74 

10.61 

11.13 

9.46 

12.84 

19.65 

20.10 

15.03 

B.     I 

NDUSTRiAL  Material, 

and  Equipment 

Item 

1911 

1912 

1913 

1914 

1915 

1916 

1917 

1918 

1.  Total  Assets 

$4,604 

.$5,013 

$5,227 

.$5,306 

$5,890 

$6,809 

$8,155 

$8,382 

2.  Total  Liabihties 

(Excl.  funded  debt) 

378 

441 

527 

531 

854 

941 

1,651 

1,937 

3.  Net  Worth 

4,226 

4,572 

4,700 

4,775 

5,037 

5,868 

6,504 

6,445 

4.  Funded  Debt 

974 

1,069 

1,071 

1,062 

1,010 

1,025 

1,132 

1,112 

5.  Capital  Stock 

2,784 

2,981 

3,062 

3,160 

3,295 

3,469 

3,589 

3,402 

6.  Net  Income 

265 

309 

342 

220 

444 

999 

886 

627 

7.  Interest    paid    on 

Funded  Debt 

43 

46 

47 

46 

46 

47 

51 

52 

8.  Amount  earned  for 

Capital  Stock .... 

222 

263 

295 

183 

398 

952 

835 

574 

9.  Dividends  paid  on 

Capital  Stock .... 

189 

167 

183 

157 

224 

360 

424 

323 

10.  Rate    of     Return 

Earned  (per  cent) : 

On  Net  Worth . . 

6.27 

6.76 

7.30 

4.78 

8.81 

17.02 

13.62 

9.72 

On  Capital  Stock 

8.00 

8.82 

9.63 

5.80 

12.08 

27.45 

23.25 

16.89 

♦Based  on  a  .■-tudy  made  by  a  well-known  certified  public  accountant. 


492 


PROBLEMS  IN  BUSINESS  FINANCE 


IV.  Percentage  of  the  Various  Types  of  Securities  Outstanding 
IN  Typical  Industrial  Companies 

An  analysis  of  the  capitalization  of  groups  of  typical  industrial 
companies  shows  the  following  relationships  and  changes  in  the  nature 
of  the  securities  outstanding  between  1900  and  1920*: 

A.    Co.\L  AND  Iron  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

Preferred  Stock 

71.5 
4. 
5. 

55.1 

2.5 
13. 
1.1 

28.2 

45.5 
13.3 

7.7 

.4 

32.8 

50. 

14.2 

12.3 

3. 
17.3 

3.2 
1,500 

50.2 
18 

Mortgage  Bonds 

Debenture  Bonds 

8.7 
4 

Miscellaneous  and  Subsidiaries'  bonds .  .  . 

Notes 

19  3 

18.6 

Shares  of  no  par  value  (000  omitted) .... 

1,500 

1,500 

B.     Iron  and  Steel  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

Preferred  Stock 

Mortgage  Bonds 

56. 
44 

37. 
27. 
.25 

37.2 

25. 

2.6 

.8 

34.25 

.5 

36.1 

24.6 

4.5 

.15 
33.7 

.75 

38. 
25. 
3  2 

Debenture  Bonds 

2  1 

Miscellaneous  and  Subsidiaries'  bonds .  .  . 

Notes 

35.3 

31.6 
03 

Shares  of  no  par  value 

2,344,000 

C.     Mining  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

Preferred  Stock 

86. 
9.9 
4. 

79. 

19.3 
1. 
.6 
.2 

78.5 
21. 
.15 

^12 

78.5 
15.7 

17 

2 

"2.6' 

71.7 
12.1 

Mortgage  Bonds 

4  1 

Debenture  Bonds    

6 

Miscellaneous  and  Subsidiaries'  bonds. . . 
Notes 

5.9 

.27 

Shares  of  no  par  value 

5,052,000 

D.     Oil  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

65. 

12.8 

10,3 

9. 

2.5 

54  5 

Preferred  Stock 

30 

Mortgage  Bonds. .  . 

1  7 

Debenture  Bonds 

2  7 

Miscellaneous  and  Subsidiaries'  Bonds. . 

1 

Notes 

11 

Shares  of  no  par  value 

9,156,000 

♦Based  on  a  study  made  by  a  second-year  student  in  the  Harvard  Graduate  School  of  Business 
Administration. 


STATISTICAL  APPENDIX 


493 


L.     Kailkoad  Equipment  Companiks 


Type  of  Security 


Common  Stock 

Preferred  Stock 

Mortgage  Bonds 

Debentures 

Miscellaneous  and  Subsidiaries'  Bonds . 

Notes 

Shares  of  no  par  value 


1900 


53. 
46. 


1905 


51. 

46. 

1. 


1.3 


1910 


4S. 
42.8 
1.8 


3.7 
3  7 


1915 


50.7 

38.8 

4  9 


4.4 
15 


1920 


54.5 
39. 
4  3 


2  4 
220,000' 


F.     Sugar  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

58. 
41. 

55. 
45. 

55. 
44.5 

50. 
43. 

46. 

Preferred  Stock 

52.5 

Mortgage  Bonds 

3 

Debent  ure  Bonds 

1. 

.3 
6.5 

Miscellaneous  and  Subsidiaries'  Bonds 

4 

Notes 

.8 

Shares  of  no  par  value . 

005,000 

G.     Tobacco  Companies 


Type  of  Security 

1900 

1905 

1910 

1915 

1920 

Common  Stock 

Preferred  Stock 

47.8 
52.2 

18.4 
32.8 

24.7 
35.8 

45.3 
36 

42. 
31.6 

Mortgage  Bonds 

Debentures 

48.7 

39.4 

18.5 

13.1 

Miscellaneous  and  Subsidiaries'  Bonds. . 

3  3 

Notes 

10  3 

Shares  of  no  par  value 

90,000 

H.    Automotive  and  Automobile  Accessory  Companies 


Type  of  Security 


Common  Stock 

Preferred  Stock 

Mortgage  Bonds 

Debentures 

Miscellaneous  and  Subsidiaries'  Bonds. 

Notes 

Shares  of  no  par  value 


1900 


1905 


1910 


1915 


52. 
44.3 


3.8 


1920 


44.3 

52. 


3  8 
22,472,000 


494 


PROBLEMS  IN  BUSINESS  FINANCE 


V.  Standards  for  Credit  Granting 
IN  Various  Industries 

One  of  the  most  interesting  studies  on  the  subject  of  "Financial 
Standards"  was  made  by  Mr.  Alexander  Wall,  Secretary  and  Treasurer 
of  the  Robert  Morris  Associates  (formerly  of  the  Detroit  National 
Bank  of  Commerce),  at  the  request  of  the  Federal  Reserve  Board. 
From  this  study,  which  appeared  in  the  Federal  Reserve  Bulletin  for 
March,  1919,  the  following  tables  are  given.  In  interpreting  these 
tables,  the  reader  should  remember  that  they  cover  only  one  year. 
The  average  results  of  an  analysis  covering  a  period  of  years  might 
show  different  relationships. 


1 — Wholesale  Dry-Goods — Type  1. 


state- 

Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

ments 

Assets 

Liabilities 

ables 

dise 

Assets 

Worth 

0 

1 

$11,215 

$4,646 

$5,067 

$5,039 

$5,674 

$2,037 

$8,191 

$29,749 

7 

2 

11.690 

5,436 

6.048 

5.500 

5.400 

2.026 

7,659 

25,266 

12 

3 

12.680 

5.093 

5,125 

4.831 

7.209 

2.623 

10,184 

23,783 

6 

4 

4.287 

1.497 

1,497 

1.920 

2.340 

472 

3,494 

7,817 

4 

5 

9.203 

4,216 

4.466 

4.104 

4.055 

1,551 

6,290 

13.598 

12 

6 

42.364 

21.648 

21.648 

19,137 

20,442 

9.6.54 

26.546 

82,025 

27 

7 

31.834 

13,118 

13,128 

12.106 

16.392 

7,020 

25.7.52 

61,409 

4 

8 

1,849 

698 

698 

743 

1,058 

837 

1,987 

4.027 

5 

9 

7,S.H 

3,178 

3.178 

2.956 

4.006 

546 

5.525 

12,659 

83 

$132,976 

$.TO,530 

$60,855 

$56,236 

$60,576 

$26,766 

$95,628 

$260,333 

2 — Wholesale  Hardware — Type  2. 


State- 

Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

ments 

Assets 

Liabilities 

ables 

dise 

Assets 

Worth 

2 

1 

$788 

$352 

S352 

$319 

$325 

$  193 

$833 

$1,974 

10 

2 

6.428 

2,410 

2.791 

1.706 

4.1.55 

1.372 

4.949 

13.760 

14 

3 

8.898 

2,253 

2.603 

3.318 

5.234 

3.4  16 

9,578 

18.192 

25 

4 

19.791 

7,281 

7,327 

8.077 

10.655 

2.693 

15,530 

36,303 

8 

5 

21.262 

8.074 

8,108 

8.487 

11.805 

5.810 

18,765 

41.161 

13 

6 

8.989 

2.359 

2.434 

2.309 

5.904 

1,182 

7,536 

18.290 

16 

7 

10.865 

4.278 

4.3.59 

3.734 

6.306 

1.466 

7,642 

19.856 

4 

8 

4.851 

1.899 

1.899 

1.732 

2.977 

1,741 

4,651 

9,949 

7 

9 

10,417 

3.595 

3.655 

3.006 

6.808 

1,887 

8,512 

18.175 

99 

$92,289 

$32,501 

$33,528 

$32,688 

$54,209 

$19,790 

$77,996 

$177,660 

3 — Wholesale  Grocer — Type  3. 


State- 

Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

menis 

Assets 

Liabilities 

ables 

dise 

AsseU 

Worth 

5 

1 

$3,207 

$1,578 

$1,643 

$1,470 

$1,470 

$451 

$2,027 

$10,037 

24 

2 

17,858 

7.794 

10,707 

6.835 

9,213 

9.326 

16.568 

59.128 

29 

3 

24,420 

10,038 

10,095 

7.423 

15,601 

6.477 

20.642 

80,095 

47 

4 

20,139 

7„574 

7,646 

9.242 

9.526 

3.623 

16.387 

64,039 

15 

5 

20.638 

8.683 

10,319 

8.812 

10.4.55 

4.067 

13.957 

60,143 

27 

6 

24.384 

10.228 

10,348 

8.499 

14.443 

5,079 

18.968 

75,238 

16 

7 

34.425 

15.383 

15.658 

14,013 

1*.134 

4,373 

22.898 

96,495 

5 

8 

1,811 

562 

562 

761 

977 

195 

1.429 

4,790 

7 

9 

5.591 

2,229 

2,262 

2,292 

3.067 

872 

4,200 

17.727 

205 

$1,52,473 

$64,069 

$69,240 

$,■^9,247 

$82,886 

$34,463 

$117,076 

$467,692 

STATISTICAL  APPENDIX 


495 


4- 

—Tanners — Type  5. 

State- 
ments 

Section 

Current 

As.se  ts 

Cilrrent 
Liabilities 

Deb! 

Receiv- 
ables 

Merchan- 
dise 

Fixed 

Assets 

Net 
Worth 

Sales 

6 

7 
8 
1 
2 
1 
1 
2 

1 
2 
3 
4 

6 
7 
9 

$22,709 

9.051 

17,443 

203 

20,241 

435 

1,.536 

4.263 

$10,847 

3,4.52 

5,561 

99 

8.635 

167 

226 

1.761 

810,847 

3.721 

6,989 

99 

8.635 

167 

226 

1.787 

$8,332 

3,028 

4,517 

CI 

4.978 

147 

883 

1,368 

$12,790 

4,717 

11,894 

128 

14,255 

273 

454 

2, .521 

$1,870 

2,632 

7,195 

15 

9,302 

73 

339 

1,099 

$12,554 

7,889 

16.857 

119 

20.880 

341 

1.645 

3.576 

$45,226 

14.474 

33.697 

479 

31.983 

871 

5.632 

5.848 

28 

$75,881 

$30,738 

$32,481 

$23,314 

$47,032 

$22,525 

$63,861 

$138,210 

5 — Drugs — Type  6. 


State- 

Section 

Current 

Current 

Debt 

Receiv- 

Merthan- 

Fixed 

Not 

Sales 

ments 

Assets 

Liabilities^ 

ables 

dise 

Assets 

Worth 

2 

1 

$18,427 

$6,749 

$6,749 

$3,913 

$13,011 

835,461 

$42,532 

$44,711 

3 

2 

5.7.55 

2.154 

2.1.54 

1,640 

3,430 

3,892 

7,050 

12.234 

3 

3 

1.906 

939 

939 

806 

970 

554 

1,478 

4,211 

4 

4 

2.405 

794 

996 

944 

1.368 

556 

1,962 

4,743 

4 

6 

2.401 

412 

412 

844 

1,471 

535 

2,503 

5.265 

1 

7 

806 

213 

238 

291 

482 

168 

739 

2.15e 

1 

8 

512 

73 

73 

149 

347 

33 

467 

1.122 

3 

9 

2.812 

1.006 

1.006 

852 

1.823 

336 

2,106 

5.597 

21 

$35,024 

$12,340 

$12,567 

$9,439 

$22,902 

$41,535 

$,58,837 

$80,030 

6 — Farm  Implement.s — Type  7. 


State- 

.Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fi.x-d 

Net 

.Sales 

ments 

Assets 

Liabilities 

ables 

dise 

Assets 

WorTh 

2 

., 

$2,798 

$1..360 

SI. 360 

31,070 

$1,453 

$1,886 

$3,323 

$6,618 

-) 

3 

7,806 

2.983 

4,483 

1,141 

5.093 

9,7.58 

12,818 

13.475 

1 

4 

764 

280 

280 

361 

390 

1.52 

636 

941 

3 

5 

31,971 

5.858 

11,871 

12,376 

15.776 

14.910 

31,413 

22.176 

6 

6 

4,491 

1,597 

1.669 

1.876 

2,3.34 

2.103 

4.693 

6.239 

1 

7 

208 

53 

53 

75 

103 

86 

242 

502 

2 

9 

8,888 

3,869 

3,869 

2.236 

5,681 

3.185 

8.203 

13.123 

20 

$56,926 

$16,000 

$23,.585 

$19,135 

$30,830 

$32,080 

$61,328 

$83,074 

7— Lumber — Type  9. 


State- 

.Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

ments 

Assets 

Liabilities 

ables 

dise 

Assets 

Worth 

4 

1 

$3..522 

$1,312 

$1,359 

$1.6.54 

$1,612 

$2,220 

$4,391 

$8,056 

3 

2 

2. .533 

1.059 

1 .059 

1,175 

802 

948 

2.410 

6.300 

a 

3 

12.309 

4.432 

4,607 

3.199 

7.656 

14,970 

20.690 

23.148 

2 

4 

1.437 

664 

664 

675 

597 

562 

1.339 

2.566 

11 

5 

13.273 

5.516 

6.220 

6.595 

5.953 

4,1.54 

11.163 

22.210 

15 

6 

8.984 

3.551 

3,552 

3.556 

4,551 

3,702 

9.315 

13,495 

4 

7 

2.030 

412 

412 

938 

968 

2.612 

4.232 

2.188 

7 

8 

5.315 

2.116 

2.116 

2.550 

2,467 

2.295 

5.416 

11,430 

2 

9 

1.789 

697 

697 

696 

922 

3.550 

4.675 

4.264 

54 

$51,192 

$19,759 

$20,686 

$21,038 

$25,528 

$35,013 

$63,631 

$93,657 

496 


PROBLEMS  IN  BUSINESS  FINANCE 


<S — Packers — Tytk  12. 


Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

menta 

Assets 

Liabilities 

ables 

dise 

Assets 

Worth 

1 

1 

$641 

$  430 

$430 

$  290 

$282 

$688 

$797 

$2,629 

1 

2 

1.120 

I7.'> 

175 

278 

751 

2.189 

2  685 

2.652 

10 

3 

397.28(1 

I69.S<I0 

251 ,470 

146,215 

176,792 

1.57.932 

297,443 

1,490,928 

3 

6.087 

2.9.':-0 

2,».'J0 

1.754 

3,505 

4.059 

7,155 

33,804 

1 

0 

220 

118 

118 

20 

195 

155 

2.57 

916 

1 

8 

1.776 

1.046 

1.046 

591 

1,108 

1,272 

2,003 

4,987 

2 

9 

10.330 

3.663 

3.663 

2.584 

5,268 

9.114 

12,212 

22,805 

19 

$417,460 

$177,272 

$259,851 

$151,732 

$187,901 

$175,409 

$322,552 

$1,558,781 

9 — Boots  and 

Shoes— 

-Type  IS 

State- 

Section 

Current 

Current 

Debt 

Receiv- 

Merchan- 

Fixed 

Net 

Sales 

ments 

Assets 

Liabilities 

ables 

dise 

Assets 

Worth 

20 

1 

S51.265 

S23.669 

$24,083 

823,200 

$23,871 

$13,678 

$41,616 

$109,817 

14 

2 

43.765 

20.216 

20.241 

12,860 

24.570 

1,503 

24,473 

53,080 

9 

3 

6.258 

2,025 

2,137 

2,742 

3,243 

816 

4,922 

13,438 

1 

4 

815 

216 

216 

470 

324 

71 

669 

914 

7 

5 

9.082 

3.930 

3.930 

3,847 

4,417 

1,695 

6,722 

16,126 

10 

6 

52.600 

22.904 

23.084 

19.374 

29,979 

26.212 

33.822 

121.073 

2 

7 

2,179 

673 

673 

798 

1,237 

222 

1,729 

3,290 

1 

8 

211 

118 

118 

98 

SO 

156 

249 

401 

2 

9 

1,638 

698 

698 

F'19 

987 

146 

1,086 

3.397 

66 

$167,813 

$74,449 

$75,180 

$63,908 

$88,707 

$44,499 

$115,288 

$321,536 

10— Dry-Goods— Type  1. 


Sections 

1 

2 

3 

4 

^ 

0 

7 

8 

9 

National 

No.  of  statements .  . 

6 

IJ 

6 

4 

12 

27 

4 

5 

83 

Per   ccn(. 

Per   cent. 

Per   cenl 

Per   cenl. 

Per    cent. 

Per   cent. 

Per   cent. 

Per   cent. 

Per   cenl. 

Per  cent. 

Current  ratio 

241.39 

215.04 

248.96 

288.37 

218.28 

195.69 

242.67 

264.89 

247.13 

223.38 

Receivables — mer- 

chandise   

90.41 

101.85 

67.01 

82.05 

101.21 

93.61 

73.85 

70.22 

73.48 

84.61 

Worth — fixed  assets 

402.11 

378.03 

388.29 

740,25 

405.54 

274.97 

366.83 

237.39 

1.011.90 

357.27 

Sales — receivables . . 

590.37 

459.38 

492.29 

407.13 

331.33 

428.16 

507.26 

541.49 

428.24 

462.10 

Sales  — merchandise 

524.30 

467.88 

329.90 

334.05 

335.33 

401.25 

374.62 

380.62 

316.00 

991.03 

.Sales— worth 

363.19 

329.88 

233.. 53 

223.72 

216.18 

308.99 

238.46 

202.66 

229.12 

272.23 

Debt — worth 

61.86 

78.96 

50.32 

42.84 

71.00 

36.36 

.50.9  < 

35.12 

57.52 

63.66 

11 — Hardware — Type  2. 


Sections 

1 

2 

3 

4 

5 

6 

7 

8 

9 

National 

No.  of  statements .  . 

^ 

JO 

14 

25 

8 

13 

16 

4 

7 

99 

Per    cenl. 

Per   cent. 

Per   cent 

Per   cenl. 

Per   cenl. 

Per   cenl. 

Per   cent. 

Per   cent. 

Per   cenl. 

Per  cent. 

Current  ratio 

223.22 

266.72 

394.94 

271.82 

263.33 

381.05 

253.97 

255.45 

289.76 

283.95 

Receivables — mer- 

chandise  

98.15 

41.06 

63.39 

75.80 

71.89 

38.84 

59.21 

58.17 

44.15 

60.29 

Worth — fixed  assets 

431.60 

260.70 

277.94 

576.68 

322.97 

637.56 

521.28 

267.14 

457.00 

394.11 

.Sales — receivables . . 

61S.80 

806.58 

.548.28 

449.46 

484.98 

792.11 

531.76 

574.42 

604.62 

543.50 

.Sales  — merchandise 

607.38 

331.16 

347.57 

340.71 

348.67 

207.70 

314.87 

334.19 

266.96 

3:27.73 

Sales — worth 

236.97 

278.03 

189.93 

233.76 

219.34 

242.70 

259.83 

213.91 

213.52 

227.78 

Debt — worth 

42.25 

56.39 

27.17 

47.15 

43.20 

32.29 

48.86 

40.82 

42.93 

42.98 

STATISTICAL  APPENDIX 


497 


12 — Grocers — Type  3. 


Sections 

1 

2 

3 

4 

5 

0 

7 

8 

9 

National 

No.  of  statements . 

5 

24 

29 

47 

15 

27 

46 

5 

7 

205 

Current  ratio 

Receivables — mer- 

cbandi.He 

Worth — fixed  assets 
Sales— receivables  . 
Sates  — merchandise 

Sales — worth 

Debt— worth 

Per   cent. 

203.26 

100.00 
499.41 
682.78 
682.78 
495.16 
81.05 

Per   cent. 
229.12 

74.18 
177.66 
865.07 
641.77 
356.87 

64  61 

Per   cent. 
243.27 

47.58 

318.69 

1.079.03 

413.39 

388.01 

4890 

Per   cent 
265.89 

97.56 
452.58 
692.91 
672.25 
390.79 

46.65 

Per  cent, 
237.68 

84.26 
343.17 
682.51 
575.25 
430.91 

73.93 

Per  cent. 
238.42 

58.84 
373.45 
885.25 
520.93 
396.65 

54.55 

Per   cent. 
223.78 

77.27 
523.62 
688.61 
532.12 
421.41 

68.38 

Per  cent. 
322.22 

77.89 
732.82 
629.43 
400.29 
33.5.19 

39.32 

Per   cent. 
250.82 

74.73 
481.65 
773.42 
577.89 
422.07 

53.85 

Per  cent. 
237.98 

71.60 
339.71 
788.06 
564.25 
399.47 

59.14 

13 — T.^NNERS — Type  o. 


Sections 

1 

2 

3 

4 

5 

6 

7 

H 

9 

National 

No.  of  statements. 

6 

7 

8 

1 

2 

1 

1 

2 

28 

Current  ratio 

Receivables— mer- 
chandise   

Worth — fixed  assets 
Sales — receivables. . 
Sales  — merchandise 

Sales — worth 

Debt — worth 

Per   cent. 
209.35 

65.14 
671.33 
.542.79 
3.53.60 
360.25 

86.40 

Per   cent 
202.19 

64.19 
299.73 
359.33 
306.84 
183.47 

47.29 

Per    cent. 
313.66 

37.97 
234.28 
74600 
283.31 
199.89 

41.46 

Per   cent. 
205.05 

47.65 
793.33 
785.24 
374.21 
402.53 

43.35 

Per   cent. 
234.40 

34.92 
224.46 
642.98 
224.36 
1.53.17 

41  35 

Per   cent. 
260.47 

53.84 
467.12 
592.51 
319.04 
255.42 

48.97 

Per    cent. 
379.64 

25.59 

487.90 

637.82 

1,240.52 

342.37 

13.37 

Per   cent. 

Per   cent 
241.28 

54.26 
325.37 
427.48 
231.97 
166..53 

49.97 

Per   cent. 
246.86 

49.57 
283.51 
592.81 
293.86 
216.42 

50.86 

14 — Drugs— Type  6. 


Sections 

' 

2 

3 

4 

5 

6 

7 

8 

9 

National 

No.  of  atatements.  . 

3 

3 

4 

0 

4 

1 

1 

3 

21 

Current  ratio 

Receivables — mer- 

Per   cent. 

273.03 

30.07 
111.94 
1,142.62 
343.64 
105.12 
15.86 

Per   cent. 
267.17 

47.81 
181.14 
745.97 
356.66 
173.. 53 

30.55 

Per   cent. 
202.98 

83.09 
266.78 
52245 
434.12 
284.91 

63.53 

Per   cent. 
302.89 

69.00 
352.87 
502.43 
346.71 
241.74 

.50.76 

Per   cent. 

Per  cent. 
582.75 

57.37 
467.85 
623.81 
357.91 
210.34 

16.46 

Per   cent. 
378.40 

60.37 
439.88 
740.89 
347.30 
291.74 

32.20 

Per   cent. 

701.36 

42.94 

1.415.15 

753.02 

323.33 

240.25 

15.63 

Per   cent. 
279.52 

46.73 
626.78 
656.92 
307.02 
265.76 

47.76 

Per  cent. 
383.83 

Worth — fixed  assets 
Sales— receivables., 
dales  — merchandise 

Sales — worth 

Debt — worth 

141.85 
847.96 
349.48 
136.06 
31.36 

15 — F,\RM  Implements — Type  7. 


Sections 

' 

2 

3 

4 

5 

6 

7 

8 

9 

National 

2 

•^ 

1 

3 

6 

1 

2 

20 

Per  cent. 

Per   cent. 
205.73 

73.64 
176.19 
618.50 
455.47 
199.15 

40.92 

Per   cent. 

261.68 

22.40 
131.35 
1.180.98 
264.57 
105.12 
34.97 

Per   cent. 
272.85 

92.56 
418.42 
260.60 
241.28 
147.95 

44.02 

Per   cent. 

545.78 

78.45 
210.88 
179.18 
140.56 
70.59 
37.79 

Per   cent 
281.21 

80.37 
223.15 
232. 56 
26r.30 
132.94 

35.56 

Per   cent. 
483.61 

72.81 
281.39 
569.32 
487.37 
207.43 

21.90 

Per   cent. 

Per  cent. 
329.72 

39.35 
257.56 
588.86 
230.99 
150.97 

47.16 

Per  cent 
8S5  78 

Receivablee — mer- 

43  60 

Worth — fixed  assets 
Sales — receivables. 
Sales  — merchandise 

191.17 
329.62 
209.33 
102  84 

498 


PROBLEMS  IN  BUSINESS  FINANCE 


16— 

Lumber — Type  9. 

' 

2 

3 

4 

5 

6 

8 

9 

Nutional 

No.  of  statetncnts 

4 

3 

0 

2 

11 

15 

4 

7 

2 

64 

Current  ratio 

Receivables — mer- 
chandise  

Per   cent. 

268.44 

102.60 

97.79 

487.06 

499.75 
184.46 
30.94 

Per   cent. 

239.18 

146.50 
254.21 
536.17 
785.53 
261.41 
43.94 

Per   cerU. 
277.72 

41.78 
138.20 
723.60 
302.35 
111.87 

22.25 

Per  cent. 

218.41 

113.06 
238.25 
380.14 
429.81 
191.63 
49.58 

Per   cent. 

240.62 

110.78 
268.92 
336.77 
373.08 
198.96 
55.71 

Per  cent. 
2.52.99 

78.13 
251.62 
379.49 
296.52 
144.87 

38.13 

Per  cent. 

492.71 

96.90 
162.02 
233.26 
226.03 
51.70 
43.92 

Per   cent. 

251.18 

103.36 
186.43 
448.23 
463.31 
211.04 
39.06 

Per   cent. 

256.67 

75.58 

131.68 

612.64 

462.47 

91.20 

17.90 

Per  cent. 
259.08 
82.37 

Worth— lixed  assets 
Sales — receivablea. . 
Sales —  merchandise 

Sales — worth 

Debt — worth 

181.73 
445.18 
366.87 
147.18 
32.50 

17 — Packers — Tyhe  12. 


1 
1 

2 

3 

4 

5 

6 

7 

8 

9 

No.  of  statements.  . 

1 

10 

Per   cent. 

157.98 
233.84 

82.70 

188.33 

1.019.68 

843.32 

501.24 

84.54 

Per   cent. 

3 

Per   cent. 

1 
Per  cent. 

Per   cent. 

1 
Per   cent. 

2 
Per   cent. 

19 

Per   cent. 

Per   cent. 

Per   cent. 
160.65 

Current  ratio 

Receivables — mer- 
chandise  

Worth — fixpd  a.ssets 
Sales— receivables.. 
Sales —  rnercliandise 

Sales — worth 

Debt — worth 

149.06 

102.83 
110.02 
906.55 
932.36 
329.86 
53.95 

640.00 

37.02 
122.65 
9.53.95 
353.12 

98.77 
6..50 

206.33 

50.04 

176.27 

1.093.67 

766.16 

473.06 

41.22 

186.44 

10.25 

165.80 

4. .580.00 

469.74 

3.56.42 

45.91 

169.79 

53.33 
1.57.46 
843.82 
450.00 
248.97 

58.22 

282.00 

49.05 
133.99 
882. .54 
432.89 
186.74 

29.98 

235.49 

80.75 
183.88 
1.027.30 
829.57 
483.27 

80.56 

IS- 

—Boots  and  Shoes— 

-Type 

13. 

1 

" 

3 

4 

5 

6 

7 

8 

9 

National 

No.  of  stateiucnts.  . 

20 

14 

9 

1 

7 

10 

2 

1 

2 

65 

Current  ratio 

Receivables— mer- 
chandise  

Worth — fixed  assets 
Sales — receivables.  . 
Sales —  merchandise 

Sales — worth 

Debt — worth 

Per   cent. 
216.59 

97.18 
204.25 
473.34 
400.04 
263.88 

57.86 

Per   cent. 

216.48 

.52.34 
1.628.27 
412.75 
216.03 
216.89 
82.70 

Per   cent. 
309.03 

84.55 
513.18 
490.08 
414.36 
273.01 

43.41 

Per   cent. 

377.31 

145.06 
942.25 
194.46 
282.09 
136.62 
32.28 

Per   cent. 
231.09 

87.09 
396.57 
419.18 
365.08 
239.89 

58.46 

Per   cent. 
229.65 

64.62 
129.05 
624.92 
403.85 
3.57.97 

68.25 

Per   cent. 
323.77 

64.51 
778.82 
412.28 
265.96 
190.28 

38.92 

Per   cent. 

178.81 

122.50 
159.61 
409.18 
501.25 
161.04 
29.82 

Per   cent. 
234.67 

52.58 
743.85 
654.52 
344.17 
312.79 

64.27 

Per  cent. 
225.40 

72.04 
259.07 
503.12 
362.46 
278.89 

65.21 

19 — National 

Type  Ratios 

Types 

1 

2 

3 

5 

6 

7 

9 

12 

13 

No.  of  statements.  . 

83 

99 

205 

28 

21 

20 

54 

19 

66 

Current  ratio 

Special  current  ratio 
Receivables — mer- 

Per  cent. 
223.38 

Per   cent. 
283.95 

Per   cent. 
237.98 

Per   cent. 
246.86 

Per   cent. 
269.35 

Per  cent. 
355.78 

Per   cent. 
259.08 

Per  cent. 

235.49 
160.65 

80.75 

183.88 

1,027.30 

829.57 

483.27 

80.56 

Per   cent. 
225.40 

84.61 
357.27 
462.10 
391.03 
272.23 

63.66 

60.29 
394.11 
543.50 
327.73 

227.78 
42.98 

71,60 
339.71 
788.06 
564.25 
399.47 

59.14 

49.57 
283.51 
592.81 
293.86 
216.42 

50.86 

41.21 
141.65 
847.96 
349.48 
136.05 

21.35 

63.50 
191.17 
329.62 
209. .33 
102.84 

38.45 

82.37 
181.73 
445.18 
366.87 
147.18 

32.50 

72.04 
259.07 
503.12 
362.48 
278.89 

65.21 

Worth — fixed  assets 
Sales — receivables . . 

Sales — worth 

Debt — worth 

STATISTICAL  APPENDIX 

20 — National  Mixed  Type  Ratios 


499 


SectiODB 

1 

2 

3 

4 

S 

6 

7 

8 

0 

National 

91 

138 

105 

107 

Per  ccnl 

270.85 
70.05 
199.47 
515.08 
360.82 
188.94 
46.13 

144 

Per  ccnl 

237.02 
66.09 
186.80 
760.26 
506.48 
297.60 
46.14 

127 

36 

41 

981 

Receivables — merchandise 

Worth—  fixed  assets _.. 

Per  ccnl 

233.4.< 
69.76 
191.48 
586.16 
408.91 
209.21 
43.28 

rcT  cent 

234.6.i 
59.95 
184.06 
659.48 
395.39 
200.71 
43.35 

Per  ccnl 

236.02 
61.17 
165.15 
890.14 
544.55 
2S1.55 
52.46 

Per  ccvl 

261.20 
82.43 
289.95 

5.58.87 

460.68 

248.97 

43.38 

Per  cent 

252.40 
71.89 
345.43 
627.90 
451.58 
293.25 
48.98 

Per  tent 

305.55 
69.51 
178.84 
568.12 
394.94 
142.52 
22.16 

Per  een: 

256.81 
56.11 
239.77 
776.04 
435.46 
246.22 
38.58 

Per  cent 

241.24 
64.64 
184.47 
734  61 

Sales — merchandise 

Sales — worth —  .^ — 

473.44 
249.34 

500  PROBLEMS  IN  BUSINESS  FINANCE 


VI.  Financial  Standards  in  the  Rubber  Tire  Industry 

An  analytical  study  of  the  finances  of  the  smaller  rubber  tire  com- 
panies in  the  United  States,  covering  the  last  decade,  shows  the  follow- 
ing interesting  relations*: 


♦The  figures  were  compiled  under  the  author's  direction  by  a  second-year  student  in  the  Har. 
vard  University  Graduate  School  of  Business  Administration. 


STATISTICAL  APPENDIX 


501 


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3  53  si  53  s3j;„s:„£;  S  3  «  « 


502  PROBLEMS  IN  BUSINESS  FINANCE 

VII.  Financial  Standards  in  the  Automobile  Industry 

A  comparative  study  of  the  financial  condition  of  all  automobile 
companies  in  the  United  States  for  every  year  since  1910  shows  the 
following  interesting  balance  sheet  relations:* 


Ratio  of 


1.  Current  Assets  to  Current  Liabilities .  .  .  . 

2.  Cash  to  Current  Assets 

3.  Cash  to  Current  Liabilities 

4.  Receivables  to  Merchandise  Inventory.  . . 

5.  Receivables  to  Current  Liabilities 

6.  Merchandise  to  Current  Liabilities 

7.  Current  Assets  to  Plant  Investment 

8.  Net  Current  Assets  to  Plant  Investment 

9.  Net  Worth  of  Plant  Investment 

10.  Total  Debt  to  Net  Worth 

IL  Net  Income  to  Capital  Stock 

12.  Net  Income  to  Sales 

13.  Receivables  to  Sales 

14.  Sales  to  Merchandise 


High 

Low 

4, 

2.4 

.24 

.04 

.85 

.1 

.55 

.15 

1.0 

.20 

2.75 

1.00 

3.0 

1.5 

2.5 

1.0 

3.5 

2.0 

1.0 

.4 

.32 

.1 

.18 

.04 

.27 

.5 

6. 

2.5 

Modal 
Average 


3.3 


.25 
.27 
.50 

2.00 

2.0 

1.5 

2.8 


*Thi3  study  was  made  under  the  author's  direction  by  a  second-year  student  in  the  Harvard 
University  Graduate  School  of  Business  Administration. 


STATISTICAL  APPENDIX  503 


VIII.  Financial  Standards  in  the  Cotton  Industry 

The  following  interesting  ratios  of  concerns  engaged  in  the  cotton 
business  were  worked  out  by  Mr.  G.  Livingston  Woolley,  Manager  of 
the  Credit  Department  of  the  Hibernia  Bank  and  Trust  Company  of 
New  Orleans,  and  pubhshed  in  the  July,  1920,  Bulletin  of  the  Robert 
Morris  Associates. 


.'^04  PROBLEMS  IN  BUSINESS  FINANCE 

A.     AvERAGK  Statement  of  Cotton  Broker 
Based  on  43  Names 

Assets 

Cash 1246 

Bills  and  accounts  receivable .        .  2220 

Acceptances  receivable 0013 

Cotton  on  hand 4896 

Liberty  Bonds  and  War  Savings  Stamps 0243 

Advances 0089 

Real  estate,  fixtures,  etc 0306 

Stocks  and  bonds 0739 

Sundries 0066 

Due  from  brokers — hedges 0182 

Total 1.0000 

Liabihties 

Bills  and  accounts  payable ' 6008 

Acceptances  payable 0057 

Money  on  deposit 0328 

Due  brokers  on  hedges 0149 

Accruals 0311 

Capital  accounts 2313 

Undivided  profits 0755 

Capital  reserves 0079 

Total 1  0000 


B.     Average  Statement  of  Cotton  Mill, 
Based  on  80  Names 

Assets 

Cash 0526 

Accounts  and  bills  receivable 0595 

Merchandise 2524 

Due  from  selling  agents 0366 

Liberty  Bonds  and  War  Savings  Stamps 0679 

Building,  plant  and  equipment 4950 

Stocks  and  bonds 0129 

Other  accounts  receivable,  including  due  from  officers,  etc 0052 

Fuel  and  supplies 0114 

Sundry,  including  good-will,  etc 0065 

Total IToodO 

Liabilities 

Accounts  and  bills  payable 1438 

Trade  acceptances 0008 

Due  selling  agents 0012 

Money  on  deposit 0012 

Due  affiliated  companies 0004 

Accruals 0431 

Bonded  indebtedness 0020 

Capital 2810 

Surplus 3644 

Reserves,  including  depreciation ■  1621 

Total 1.0000 


STATISTICAL  APPENDIX  505 


IX.   Classification  of  Expenses  in  Manufacturing    Industries 
Having  Products  Valued  at  More  than  $100,000,000 

in  1909 

Computations  made  from  the  United  States  Census  of  Manufac- 
tures for  1909  show  the  following  interesting  relations: 


506 


PROBLEMS  IN  BUSINESS  FINANCE 

Amounts  in  Millions  of  Dollars 


Industry 


All  Industries. 


Num- 
ber of 
Con- 
cerns 


268,491 


Capi- 
tal 


$18,428 


Value 
Of 

Prod- 
uct 


$20,672 


Net 
In- 
come 


$2,217 


Total 

Salar- 

Cost of 

Expen- 

ies 

Mate- 

ses 

and 

rials 

Wages 

$18,455 

$4,366 

$12,143 

118 

39 

60 

211 

58 

132 

340 

73 

238 

478 

117 

333 

141 

27 

102 

139 

46 

82 

118 

32 

79 

259 

15 

236 

94 

20 

64 

30 

15 

11 

513 

133 

298 

341 

99 

209 

84 

18 

64 

120 

25 

81 

177 

50 

113 

554 

147 

371 

46 

22 

18 

202 

70 

109 

31 

5 

23 

90 

12 

70 

828 

34 

768 

1,077 

415 

540 

213 

81 

109 

114 

33 

52 

176 

52 

110 

890 

189 

658 

306 

39 

248 

93 

25 

60 

195 

5 

36 

300 

64 

97 

996 

366 

508 

81 

28 

44 

111 

19 

79 

237 

50 

165 

222 

14 

199 

66 

36 

22 

619 

268 

202 

405 

199 

199 

114 

20 

82 

68 

29 

31 

177 

46 

108 

1,318 

72 

1,203 

160 

7 

152 

241 

7 

226 

366 

86 

177 

388 

83 

283 

Agricultural 
Implements .  . 

Automobiles,  etc . . 

Bakeries 

Boots  and  Shoes .  . 

Canning  and 
Preserving 

Carriages  and 
Wagons 

Car  Building 

Cheese,  Butter,etc . 

Chemicals 

Clocks,  watches,etc 

Clothing,  men's. . . 

Clothing,  women's 

Coke 

Confectionery .... 

Copper,  tin,  etc. . . 

Cotton  Goods .... 

Cutlery,  etc 

Electric  Mach 

Explosives 

Fertilizers 

Flour  Mills 

Foundries 

Furniture 

Gas  (artificial)  .  .  . 

Hosiery 

Iron  and  Steel .... 

Leather  (tanning) 
etc 

Leather  Goods . . , 

Liquor,  distilled. . . 

Liquor,  malt 

Lumber 

Musical  Instru- 
ments   

Paint  and  Varnish 

Paper 

Petroleum  Ref.  etc. 

Pottery,terra  cotta 

Printing 

Railway  Shops. 

Rubber  Goods. . 

Shipbuilding.  .  . 

Silk 

Slaughtering.  . 

Smelting — lead 

Sugar  ref 

Tobacco 

Woolen  &  Worsted 


640 

743 

23,926 

1,918 

3,767 

5,492 

110 
8,479 

349 

120 
6,354 
4,558 

315 
1,944 
4,228 
1,324 

959 

1,009 

86 

550 

11,691 

13,253 

3,155 

1,296 

1,374 

446 

919 
2,375 

613 

1,414 

40,671 

507 

791 

777 

147 

822 

31,445 

1,145 

227 

1,353 

852 

1,641 

28 

19 

15,822 

985 


256 
174 
213 
222 

119 

175 
140 

71 
155 

58 
275 
129 
152 

68 
218 
822 

67 
268 

50 
122 
349 
1,514 
227 
916 
164 
1,005 

333 

70 

72 

671 

1,177 

103 
104 
409 
182 
141 
588 
238 
99 
126 
152 
383 
132 
115 
246 
431 


146 
249 
397 
513 

157 

160 
124 
275 
118 

35 
568 
385 

96 
135 
200 
628 

53 
221 

40 
104 
884 
1,228 
240 
167 
200 
986 

328 
105 
205 
375 
1,156 

90 
125 
268 
237 

76 
738 
406 
128 

73 
197 
1,371 
167 
249 
417 
436 


28 
38 
57 
35 

16 

21 

6 
16 
24 

5 
55 
44 
12 
15 
23 
74 

7 
19 

9 
14 
56 
151 
27 
53 
24 
96 

22 
12 
10 
75 
160 

9 
14 
31 
15 
10 
119 


STATISTICAL  APPENDIX 


507 


Peucentagk  Relations 


Ratio  of 

Ratio  of 

Ratio  of 

Ratio  of 

Ratio  of 

Ratio  of 

Ratio  of 

Cost  of 

Cost  of 

Miscell'n's 

^ 

Value  of 

Net  Income 

Net  Income 

Expenses 

Services 

Materials 

Expenses 

3 

Product  to 

to  Capital 

to  Value 

to  Value 

to  Total 

to  Total 

to  Total 

c- 

Capital 

of  Product 

of  Product 

Expenses 

Expenses 

Expenses 

•-« 

112 

12 

10.8 

89.2 

23.7 

65.8 

10.5 

57 

11 

19.2 

80.8 

32.9 

51   1 

16.0 

1 

143 

21.8 

15.2 

84.8 

27.6 

62.5 

9.9 

2 

186 

26.7 

14.4 

85.6 

21.5 

69.9 

8.6 

3 

231 

15.8 

6.8 

93.2 

24.5 

69.6 

5.9 

4 

132 

13.4 

10.2 

89.8 

19.0 

72.0 

9.0 

5 
6 

91 

12. 

13.2 

86.8 

32.7 

58.9 

8.4 

88 

4.3 

4.8 

95.2 

27.3 

66.7 

6.0 

7 

387 

22.5 

6.0 

94.0 

5.7 

91.0 

3.3 

8 

76 

15.5 

20.3 

79.7 

21.5 

68.2 

10.3 

9 

60 

8.6 

14.3 

85.7 

50.6 

37.2 

12.1 

10 

206 

20. 

9.7 

90.3 

25.9 

57.9 

16.2 

11 

300 

34.1 

11.4 

88.6 

29.0 

61.1 

9.9 

12 

63 

8.0 

12.5 

87.5 

20.7 

75.5 

3.9 

13 

200 

22.1 

11.1 

88.9 

20.7 

67.9 

11.4 

14 

91 

10.5 

11.5 

88.5 

28.2 

63.7 

8.1 

15 

76 

9.0 

11.8 

88.2 

26.6 

66.9 

6.5 

16 

79 

10.4 

13.2 

86.8 

47.8 

40.1 

12.1 

17 

82 

7.0 

8.6 

91.4 

34.5 

53.8 

11.7 

18 

80 

18. 

22.5 

77.5 

17.3 

72.5 

10.2 

19 

85 

11.5 

13  5 

86.5 

13.2 

77.2 

9.7 

20 

252 

16.0 

6.3 

93.7 

4.1 

92.8 

3.1 

21 

82 

10. 

12.3 

87.7 

38.5 

50.1 

11.4 

22 

106 

11.9 

11.2 

88.8 

38.1 

51.0 

10.9 

23 

18.2 

5.8 

31.7 

68.3 

29.4 

46.2 

24.5 

24 

122 

14.6 

12.0 

88.0 

29.8 

62.7 

7.4 

25 

98 

9.6 

9.7 

90.3 

21.3 

73.9 

4.8 

26 

99 

6.6 

6.7 

93.3 

12.7 

81.2 

6.1 

27 

150 

17.1 

11.4 

88.6 

26.5 

64.6 

8.9 

28 

285 

13.9 

4.9 

95.1 

2.6 

18.4 

79.0 

29 

57 

11.2 

20. 

80. 

21.3 

32.2 

46.5 

30 

96 

13.4 

13.8 

86.2 

36.8 

51.0 

12.2 

31 

87 

8.7 

10.0 

90.0 

35.1 

54.2 

10.7 

32 

120 

13.5 

11.2 

88.8 

16.8 

71.1 

12.2 

33 

65 

7.6 

11.5 

88.5 

21.2 

69.7 

9.1 

34 

130 

8.3 

6.3 

93.7 

6.2 

89.6 

4.2 

35 

54 

7.1 

13.2 

86.8 

54.2 

33.4 

12.5 

36 

125 

20.2 

16.1 

83.9 

43.3 

32.6 

24.1 

37 

49.0 
17  1 

49.2 
72.0 

1.8 
10.9 

38 

■ ' 129' 

"ha" 

10.9 

'"89'l" 

39 

58 

4.0 

6.8 

93.2 

43  4 

46.2 

10.4 

40 

130 

13.2 

10.2 

89.8 

26. 

60.8 

13.2 

41 

358 

14.1 

3.9 

96.1 

5.4 

91.3 

3.3 

42 

126 

5.3 

4.2 

95.8 

4.3 

94.8 

0.9 

43 

216 

7.0 

3.2 

96.8 

3.0 

93.8 

3.2 

44 

170 

20.7 

12.2 

87.8 

23.5 

48.4 

28  0 

45 

101 

11.1 

11.0 

89.0 

21  3 

72.9 

5.8 

46 

508 


PROBLEMS  IN  BUSINESS  FINANCE 


X.  Classified  Expenses  in  Retail  Stores 

Figures  recently  issued  by  the  National  Association  of  Newspaper 
Executives  show  the  common  experience  in  percentage  of  net  sales 
in  the  principal  branches  of  retail  trade.  These  figures  are  compiled 
from  data  furnished  by  the  Harvard  University  Bureau  of  Business 
Research  and  some  of  the  retail  research  organizations.  They  were 
recently  published  in  the  Retail  Public  /Wf/pr  (March  IG,  1921). 


De- 
part- 
ment 


Gro- 
cery 


Drug 


Hard- 
ware 


Furni- 
ture 


Men's 
Cloth- 
ing 


Shoe 


Jewel- 
ry 


Rent 

Salaries 

Advertising* 

Heat  and  Light 

Delivery 

Supplies 

Insurance  and  Taxes . 
General  expenses .... 
Depreciation  and 

Shrinkage 

Bad  debts 


3.24 
9.65 
4.67 
54 
1.02 
.38 
1.08 
4.15 

1.11 

21 


3.07 

8.46 

1.83 

.39 

2.53 

.37 

.58 

.45 

.76 

,47 


4.02 
10.95 

2.76 
.69 
.51 
.35 

1.21 

4.49 

.47 
.19 


3.41 

0.11 

1.12 

.43 

.91 

.60 

.99 

2.01 

.52 
.31 


5.04 

9.73 

3.72 

.92 

94 

41 

1.57 

1.10 

2.14 
1.94 


2.16 
.34 


3.21 

10.51 

2.65 

1.10 

.46 

.30 

1.03 

4.36 

.50 
.10 


4.98 
10.96 

2.85 
.61 
.09 
.89 

1.32 

3.95 

.95 
.21 


Total    percentage    of 
expenses  to  sales . . 


26  05 


18.91 


25.65 


20.41 


27.51 


23.27 


24.22 


26.81 


♦Specialty  store  advertising  can  run  as  high  as  5.5  per  cent. 

Extremely  valuable  computations  of  a  more  detailed  sort  are  being 
made  annually  by  the  Harvard  University  Bureau  of  Business  Research 
for  the  following  lines  of  business:  Retail  Grocery,  Wholesale  Grocery, 
Retail  Shoe,  Wholesale  Shoe,  Retail  Hardware,  Retail  Jewelry,  Retail  Drug. 


STATISTICAL  APPENDIX 


509 


XI.  The  Annual  Turnover  of  Stock  in  Retail  Stores 

There  are  presented  herewith  figures  regarding  the  turnover  of 
inventory,  collected  from  various  sources. 

This  following  table  (A)  is  based  on  the  result  of  questionnaires 
sent  to  about  5,000  different  concerns,  the  results  of  which  were  pub- 
lished in  the  Bulletin  of  the  National  Association  of  Credit  Men  (April. 
1917,  page  240) : 


A.  General  Retail  Stores 

Business 

Stock  Turnover 

Percentage 
Cost  of  Doing  Busi- 
ness (on  Net  Sales) 

Groceries 

Department  Stores . . 

10 
7 
4 
4 

3^ 
3 
2 
2 

16 

24% 
23 

Drugs 

Dry-Goods 

Hardware 

19H 
24 
23  i^ 

Furniture 

Boots  and  Shoes 

Clothing 

20H 

25% 

Jewelry 

The  annual  average  turnover  of  the  following  lines  of  stock  in 
several  hundred  department  stores  has  been  estimated  by  the  Bureau 
of  Business  Standards  of  the  A.  W.  Shaw  Company  as  follows: 


B.  Turnover  of  Stock 

IN  Department  Stores 

Type  of  Goods 

Stock  Turnover 

Type  of  Goods 

Stock  Turnover 

Notions 

Corsets 

9 

8 

6 

4.2 
4.2 
4.1 

Hosiery 

Gloves 

4 
3  5 

Women's  ready-to- 

Dress  goods 

3  2 

wear  clothing 

Wall  paper 

Men's  furnishings 

Silks 

Domestics 

Carpets 

3.1 
3 
1  5 

Underwear 

The  annual  stock  turnover  in  the  Rexall  chain  of  drug  stores  was 
some  years  ago  reported  to  be  as  follows : 

C.  Turnover  in  Rexall  Stores 


Type  of  Goods 

Stock  Turnover 

Type  of  Goods 

Stock  Turnover 

Soda  water 

Candy 

Cigars 

52 
20 

15 

General  merchan- 
dise   

Total  Store 

8 
10 

510 


PROBLEMS  IN  BUSINESS  FINANCE 


XII.  Relative  Advertising  Expenses  in  Typical  Concerns 

A  study  covering  1,489  cases,  the  results  of  which  have  recently 
appeared  in  System  (May,  1921,  p.  673,  ff.),  shows  the  following 
interesting  relations  of  advertising  expenses  and  total  selling  expenses 
to  net  sales,  in  manufacturing  concerns: 


Percentage  Expense 

ON  Net  Sales 

Business 

Advertising 

Total  Selling 

Trunk  manufacturing 

Hardware  manufacturing 

Dry-goods  jobbing 

Hosiery  manufactiu'ing 

Food  products  manufacturing 

5       % 
4.29% 
1.6  % 
1.88% 
4.55% 

12.25% 

8.      % 

7.33% 

10.     % 

14.3  % 

STATISTICAL  APPENDIX 


511 


XIII.  The  Relation  of  Net  Income  to  Invested  Capital 

A  study  of  the  relationships  which  exist  between  the  invested 
capital,  capital  stock,  and  the  not  income  of  various  types  of  manufac- 
turing concerns,  based  on  the  general  figures  given  in  the  Treasury 
Report  on  Corporate  Earnings  and  Government  Revenues  for  the 
year  1917,  shows  the  following  significant  facts: 


Investment  and  Income  Statistics  of  Garment  Manuf.j 

TURING  Concerns,  Grouped  According  to  Invested 

Capital.     (Thousands  omitted.) 


1917 

1916 

1 

2 

3 

4 

5 

6 

7 

8 

9 

10 

11 

Group 

I1 

K.    03 

o 
S 
o 
o 

a 

S-5 

gco 

O    o 

6^ 

-a 

03 

>   03 

'-'a 

s 

o 

o 

c 

H- ( 

O    O 

toe 

1^ 

Under  $10,000 

10,000-20,000 

20,000-50,000 

50,000-100,000 .... 
100,000-200,000 .  .  . 
200,000-500,000 .  .  . 
500,000-1,000,000.. 
1,000,000-2,000,000 
2,000,000-5,000,000 

17 

29 

108 

57 

37 

25 

9 

7 

2 

5.4 

11.6 

24. 

50. 

103. 

191. 

388. 

618. 

1075. 

7. 

14. 

32. 

72. 

145. 

321. 

663. 

1176. 

2349. 

4.2 

2.4 

9. 

17. 

40. 

80. 

183. 

480. 

561. 

77. 
21. 
35. 
34. 
39. 
42. 
47. 
78. 
52. 

60. 
17. 
26. 
24. 
27. 
25. 
28. 
41. 
24. 

5.2 

6.1 

22. 

45. 

100. 

201. 

416. 

544. 

825. 

6.7 

7.4 

29. 

65. 

141. 

336. 

711. 

1033. 

1798. 

2.8 

1.9 

8. 

15. 

33. 

67. 

145. 

227. 

312. 

57. 
31. 
36. 
35. 
33. 
33. 
35. 
42. 

38. 

■ 

44. 
26. 
27. 
24. 
24. 
20. 
20. 
22. 
17. 

512 


PROBLEMS  IN  BUSINESS  FINANCE 


H 
U 
Z 

o  ■ 

2  .12 

5  S 

P  o 

^  CO 

P  CO 

^  5 

"^  S 

a  < 

a  H 

^  5 


Eh     y 
03     P 


n 


a> 

c 

c2: 

t- 

ot 

CO 

r«.O(N-^t^(M00O>-<C^0S 
CCf0(N<NCC«O(NeCi-iU5 

to 

1^                                                        lO 

lO'-HtO'OOCO'MCOOOO'^ 

^      CO 

00 

CO 
coco 

tJ"  o  'C  'C  t^  lO  00  »c  cc  00 
—  ^coc;  oo5t^cc«o 

CO  'M  CO  M-  <© 
CI  —1 

t- 

Estimated 
Invested 
Capital 

>o  o^ 

■<»<  lO  CO  iM  r^  00  cJ  oi  •<*  .-1  ^ 

^co«5C^JC5-*oO'-i-*oc 

^  Tl  -f  '^  00  C^)  'M 
-H  ,-.lM  CO 

o 

03   ^i 

D-O 

C4 

O'-iCOCOiCCO'MI^COO^ 

—■(M-^ooior^co-t^-^co 

r-H  Oa  00  t^  05  t^ 

o 

IC 

c 

CO 

1 

L0C2OO«000(MC000O03 

oococo'«*icO'^'«»<co<oco<M 

1 
'J" 

03 

tTt^^OOiOC^O-^iOCDiO 

oioioio>ooit^«o<r>rj<(M 

.-1        C) 

^ 

4J 

^1 

00  CO 

t^«0C0  05-*«0OTfHt^(M00 

-HC^iCiOGOCO^Ht^OJ 
.-■  05  i-O  (M  «D  oo 

c^ico  »o 

fO 

la 

.5^ 

oscoco-^oo-^icodoooJcJ 

•— C0r-'^'MCDI>.t^O5O5 
-H  CO  O  •*  (M  C-J  — 1 

r-HCOlMO 

-^  C) 

CJ 

03   »ri 
.t2   « 

ao 

(NOO 

(Ni-iiO'-Hoor^iMcocoou5 

-Hi-i(NiOC5COOCO-*OIM 

T-i  "5f  00  CO  O  o 

1-1  00  (M 

- 

Number 
in  Each 
Group 

»-^  CM  Tt<  Ttl  CO  <-* 

c 

I 
c 

J 

) 

i 

\ 

Under  $10,000 
10,000-      20,000 
20,000-      50,000 
50,000-    100,000 
100,000-    200,000 
200,000-    500,000 
500,000-1,000,000 
1,000,000-2,000,000 
2  000,000-5,000,000 
10,000,000-20,000,000 
20,000,000-50,000,000 

STATISTICAL  APPENDIX 


513 


U 

Z 

Is 


oi 
P 

■<  a 

P  2 


«  5 

^o 

f"  a 

CC     ^ 

P  Z 

o 
u 
z 

Q 

Z 


n 


05 

C5 

a 

a; 

CM 

Jo 

tfi  ci  c^  CO  Oi  cc  ^ 

M  •>*<  (M  (M  f-i  C^  Tjt 

CO 
1 

00 

c;  o  ■<«'  CO  c^  00  — t 

i-l  Tjl  CO  •>*<  CO  •^  O 

00 

■^  a 

•^  a 

^  »0  t^  »rt  CD  <C>  --1 
.-HC^CDCO 

t^ 

Estimated 
Invested 
Capital 

OO  1— 1  CO  (M  ■*  O  O 

t-4  CO  CD  — 1  05  (M 

Ol  CO 

o 

ao 

00 

^  r-<  ^H  Tt<  !-<  CO  •^ 

^  (M  CO  00  CO  •-< 

s 

.—1 

05 

lO 

B 

o 

CO 

1 

l^  ■»*•  C^  CO  Ol  O  CD 
iC  O  CO  (M  C^  CO  -^ 

u 
z 
p 

o 

Q 

4. 

CO  >— 1  >— 1  C5  C2  lO  05 
t>-  CD  lO  Tfi  •*  CO  CO 

z 
< 

o 
z 
o 

■* 

(V 
4)   o 
^1 

T^i  ,-i  —  O)  o»  CO  t-- 

—1  -—  --H  -^  O  lO 

(J 

CO 

73^ 

(M  .-1 

00 1^  -ti  d  in'  --  r-H 

»-H  CO  r-  M*  ■*  CO 

r-l  CO  IC 

oi 

CO 

CD  00  C^i  00  -^  O  (N 
^  C^)  CO  00  CD  t>- 

-^co 

- 

Number 
in  Each 
Group 

CO  CO  Ci  CO  o  CO  ■* 

—  'O  •<*<■*  CO 

t 

5 

5 

Under  810,000 

10,000-  20,000 

20,000-  50,000 

50,000-100,000 

100,000-200,000 

200,000-500,000 

500,000-1,000,000 

514 


PROBLEMS  IN  BUSINESS  FINANCE 


p 
o 
ca 
C 

af 

« 
U 

?; 

ii 
p  § 

z  o 


OJ  <! 


PQ 


CO 


.— 1 

05 

C5 

0; 

O 

OC^(NO)o6T}<iOOOTfi 
iC'^fOCCCCCO^COCO 

ol 

00 

Ii 

>c  o 

l^ 

Estimated 
Invested 
Capital 

Ol  rf 

-H  csi  ;0  ^  O  C-1 
'-  (N  t^ 

c; 

3-^ 

ao 

OM  ■* 

00  t—  (T.  lO  O  CI  lO  ^  -^  o 

i-o  —  !M  m  t^  c 

ic 

u 

CO 
1 

Tt<001M^X^t^I~-C5 

o-*-*cococcoo'^ooc^ 

1 

eoti-^crxMr^iooi-ic 

Ot^OiO«OOOt^O«D(M 

-^ 

o 
►5 

"* 

CO 

P   G. 

S£5 

M-* 

oooo-^oqciOMcoi-i 

^cot^eooooooooo 

-^  (M  COtJhoOOO 

-H  iM  t^ 

(M 

a  o 

oc— ieccoco»o>oc<icco 

-^P^'*O(M00O<MO 

- 

Number 
in  Each 
Group 

C^  i-H  (M  r-H  T-H 

i 

< 
1 

3 
5 

J 

Under  $10,000 
10,000-20,000 
20,000-50,000 
50,000-100,000 
100,000-200,000 
200,000-500,000 
500,000-1,000,000 
1,000,000-2,000,000 
2,000,000-5,000,000 
10,000,000-20,000,000 

STATISTICAL  APPENDIX 


515 


XIV.    Corporation   Income   Distributed   by   Industrial  Groups 

The  Report  on  Statistics  of  Income  for  the  calendar  year  1918, 
recently  published  under  the  direction  of  the  Commissioner  of  Internal 
Revenue,  furnishes  the  following  significant  data: 

Distribution  op  Corporation  Income  by  Industrial  Groups  and  Into  Those 
Reportinc.  Net  Income  and  Those  Reporting  no  Net  In- 
come, Calendar  Year  1918 


Industrial  groups 


Agriculture  and  related  in- 
dustries  

Mining  and  quarrying 

Manufacturing; 

Food  products,  liquors 
and  tobacco 

Textile  and  textile  prod- 
ucts  

Leather  and  leather 
products 

Rubber  and  rubber  goods 

Lumber  and  wood  prod- 
ucts  

Paper  and  pulp  products 

Printing  and  publishing 

Chemicals  and  allied 
substances 

Stone,  clay,  and  glass 
products 

Metal  &  metal  product; 

All  other  manufacturing 
industries 


Total  Manufacturing 


Construction 

Transportation    and    other 

public  utilities 

Trade 

Public  service-professional 

amusements,  hotels,  etc. 
Finance,  banking,  insurance 

etc 

Combinations — predominant 

industry  not  ascertainable 
Inactive  concerns 


Total 
number 
of  cor- 
pora- 
tions re- 
porting 


7,SS7 
10,601 


12,657 

8,363 

1,724 
565 

6,520 
1.529 
7,198 


2,822 
13,706 


6,075 


67,274 


7,731 


18.246 
70,149 


14,899 
68,132 


8,944 
43,656 


Corporations  reporting  net  income 


Num- 
ber 


4,406 
o,.524 


9,778 

7,018 

1,434 
412 

4,985 
1,277 
5,192 

3,57fi 

1,856 
10,539 


51,205 


5,297 

12,564 
58,466 

9,745 

49,589 

5,220 
45 


Per  cent 
of  total 
number 
of  corpo- 
rations 
reporting 
in  each 
group 


55.86 
51.82 


77.25 

83.92 

83.18 
72.92 

76.46 
83 .  52 
72.13 

68.57 

65.77 
76.89 

73.66 


76.11 


68.52 


68.86 
83.35 


05.41 

72.78 


58.36 
.10 


Total 317.579  202,061      63  63     79,706,659.148  71,345.147,899    8,361,511,249 


Gross  income 


S420,465,99S 
3,597,203,674 


8,891, 

6,612, 

1,679, 
1,036, 

1,802, 
967, 

858, 


356,833 

560,029 

523,585 
684,977 

007,281 
078,872 
142,262 


3,868,858,346 


627, 
12,924, 


788,574 
990,763 


2,666,098,499 


41,935,090,021 


1,664,583,913 


'  3,226,579.289 
20,163,971,759 


805,515,406 
4.575.929,180 


3.256,848,358 
471,550 


Total 
deducti(ms 


S367,801,97« 
3,029,426,465 


8,361, 

5,847, 

1,563, 
935, 

1,628, 
870, 
792, 


459,707 

322,392 

146,831 
,089,865 

138,448 
892,369 
,200,046 


3,474.445.341 


544, 
10,871, 


741,706 
663,262 


2,354,494,040 


37,243.594,007 


1.529,721,290 

1  2,448,301.447 
19.109.498.395 

800.113.370 

3.891,268,733 

2,924,969,139 
453,075 


Net  income 


«,52,664,020 
567,777,209 


529,897.126 

765,237.637 

116,376,754 
101,595.112 

173,868,833 
96,186,503 
65,942,216 

394,413.005 

83.040.868 
2.053,327.501 

311,604,459 


4,691,496.014 


134,862.623 


778,277.842 
1,054,473,304 


65,402.036 
684.660.447 


331.879,219 
18,47'^ 


'Gross  income  and  total  deductions  incomplete 


516 


PROBLEMS  IN  BUSINESS  FINANCE 


Distribution  of  Corporation  Income  by  Industri.al  Groups  and  Into  Those 
Hkportinc;  Nkt  Income  and  Those  Repohtincj  no  Net  In- 
come, Calend.ar  Year  1918 — Continued 


Corporations  report 

ing  net  income 

Income  tax 

War  profits  and 

excess  profits 

tax 

Total  tax 

Per  cent 

of  total 

tax 

Agriculture  and  related  industries. 

$4„540,664 
49,177,732 

41,443,420 

48,930,.351 
9.750,340 
8,520,354 

14,815,718 
7,810,532 
5,.548,846 

30,215,221 

6,471,882 

140,489,116 

23,915,597 

.$8,201,0.50 
142,186,645 

165,310,172 

.344,513,264 
31,779,565 
29,814,808 
40,857,770 
28,524,482 
11,848,801 

130,.391,973 
25,584,478 

862,542.151 

102,953,969 

$12,741,714 
191, .364,377 

206,7.53,592 

393,449,615 

41,529,905 

3,S,.34 1,162 

.5.5.673,488 

36,3.35.014 

17.397.647 

160.607,194 

32,056,360 

1,003,031,267 

126,,869,566 

0.40 
6.06 

Manufacturing: 

Food  products,  liijuors  and  to- 

6  55 

Textile  and  textile  products.  .  . 
Leather  and  leather  products. . 

Rubber  and  rubber  goods 

Lumber  and  wood  products.  .  . 

Paper  and  pulp  products 

Printing  and  publishing 

Chemicals  and  allied  substances 
Stone,  clay  and  gla.ss  products 
Metal  and  metal  products .... 
All  other  manufacturing  indus- 

12.46 
1.31 
1.21 
1.76 
1  .15 
55 
5.08 
1   01 

31   76 

4.02 

T  :tal  Manufacturing.  .  . 

.S337,923,377 

.'51,774,121,433 

$2,112,044,810 

66  86 

7.421,237 

82.540,725 
79,304,014 

5,110,179 
59,093,798 

28,080,757 

64,538,221 

66,813,028 
290,597.346 

9,825,743 
60.993,402 

88.289,071 

71,959,458 

149,3.53,7.53 
369,901.360 

14.941,922 
120,087,200 

116,369.828 

2.28 

Transportation    and    other    public 

4.73 

Trade    

11.71 

Public     service — professional, 
amusements,  hotels,  etc 

Finance,  banking,  insurance,  etc  . . 

Combinations — predominant      in- 
dustry not  ascertainable 

.47 
3.81 

3.68 

Total 

$653,198,483 

$2,505,.565,939 

•$3,158,764,422 

100.00 

STATISTICAL  APPENDIX 


517 


Distribution  of  Corporation  Income  by  Industrial  Groups  and  Into  Those 
Reporting  Net  Income  and  Those  Reporting  No  Net  In- 
come, Calendar  Year  1918 — Continued 


Corporations  reporting  no  net  iiuoriir 

Indu.strml  groups 

Xuniher 

Per  cent 
of  total 
number 

of  corpo- 
rations 

reporting 
in  each 
group 

Gross 
income 

Total 
deductions 

Deficit 

Agriculture  and  related  industries. 
Mining  and  quarrying 

3,481 
5.137 

2,879 
1,345 

290 

153 
1,535 

252 
2,006 
1.639 

966 
3,167 

1,837 

44.14 

48.18 

22.75 
16.08 
16.82 
27.08 
23.54 
16.48 
27.87 
31.43 
34.23 
23.11 

26.34 

$103,714,716 
397,839,320 

534,303,851 
146,889.000 

46,583,571 

12,677,340 
197,010,348 

43,116,320 
114,873,962 
208,779,844 

62,201.989 
433,001,430 

432,623.882 

$126,031,758 
469,312,449 

.565,721,271 
154,572.788 

49..327.175 

14,491,719 
213,713,504 

46,587,807 
124.719.826 
223,650,483 

69,939,369 
477,2.57,444 

449.456,429 

$22,317,042 
71,473  129 

Manufacturing: 

Food    products,     liquors,     and 

31,417,420 

Textile  and  textile  products    . 
Leather  and  leather  products. 

Kubber  and  rubber  goods 

Lumber  and  wood  products. 

Paper  and  pulp  products 

Printins;  and  piiblishine 

Chemicals  and  allied  substances 
Stone,  clay  and  glass  products. 
Metji)  and  metal  products .  . 
All    other    manufacturing    in- 

7,683.788 
2,743.604 
1,814.379 

16,703,156 
3,471,487 
9,845,864 

14,870,639 
7,737.380 

44.256.014 

16,832,547 

Total  Manufacturing 

16,069 

23.89 

$2,232,061,537 

«2.389,437,815 

$157,376,278 

Construction 

Transportation   and   other   public 
utilities.  . . . 

2,434 

5,682 
11,683 

5,154 
18,543 

3.724 
43.611 

31.48 

31.14 
16.65 

34.59 
27.22 

41.64 
99.90 

281,716.215 

1  495,416,523 

1,497,772,270 

232,412.501 
1,313.832,572 

200,965,243 
1,891,267 

298,330,231 

'  .594,195,053 
1,. 550,664, 341 

2.52.774,793 
1,519,807,.399 

242,156,466 
4,684.220 

16,614.016 

98.778,530 

Trade 

52,892,071 

Public  service  —  professional, 
amusement,  hotels,  etc 

Finance,  banking,  insurance,  etc.. 

Combinations — predominant      in- 
dustry not  ascertainable 

20,362,292 
205.974.827 

41,191,223 
2.792.95.i 

Tor\  L          ...          

115.518 

36.37 

$6,757,622,164 

$7,447,394,525 

$689,772,361 

'Gross  inc!oine  and  tot.il  deductions  incomplete 


518 


PKOBLEMS  IN  BUSINESS  FINANCE 


XV.  Income  and  Deductions 

Distribution  of  Corporation  Income  by  Industrial  Groups  and  by  Nature 
OF  Deduction,  Calendar  ^'ear  1918 


liulustrial  groups 


Agriculture  and  re- 
lated industries. . 
Mining    and    quar 

rying 

-Manufacturiiit;: 

Food  products, 
liquors  and 
tobacco 

Textile  and  tox 
tile  products 

Leather  and  le.i 
ther  products 

Rubber  and 
rubber  goods 

Lumber  and 
wood  products 

Paper  and  puli 
products 

Printing  and 
publishing 

Chemicals  and 
allied  sub- 
stances. . . 

Stone,  clay  and 
glass  products 

Metal  and  metal 
products. . 

All  other  manu- 
facturing in 
dustries    ... 


Total  Manu- 
facturing.. 


Construction 

Transportation  and 
other  public  util- 
ities  

Trade 

Public  service — pro- 
fessional amuse- 
ments,hotels, etc  . 

Finance,  banking, 
insurance,  etc.. . . 

Combinations-  pre- 
dominant indus- 
try not  ascertain 
able 

Inactive  concerns  . 


Total 
num- 
ber of 
returns 


7,887 
lO.GGl 

12,0r,7 
8,303 
1,724 
565 
0,520 
1,529 
7,198 

5,21o 

2,822 

13,700 

0,975 


Total 

gross 

income 


07,274 


7,731 


68 


!,944 
1,656 


$524,180,714 
3,995,042,994 

9,425,060,084 
0,759,449,029 
1,720,107,150 
1,049,302,317 
1,999,017,029 
1,010,195,192 
973,010,224 

4,077,038,190 

689,990,503 

13,357,992,193 

3,098,722,381 


Cost  of 
goods 


44,107,151,558 


1,946,300,128 


>  3,721,995,812 
21,001,744,029 


1,097,927,907 
5.889,761,752 


3,457,813,601 
2,302,817 


$207,209,340 
1,806,502.018 

7,.350.838,0e2 

5,077,052,283 

1,397,470.708 

745,382,666 

1,377,307.423 

720.550,541 

437,356,863 

2,909,227,462 

419,109,992 

8,849,955,775 

2,173,134,296 


Compensa- 
tion of 
officers 


31,463,386,671 


1,215,621,964 


>  371, 
17.137 


328, 
1,624, 


2,239, 
1, 


657.480 
,499,331 


811,931 
564,798 


404.068 
159,945 


$16,144,097 
53,143,770 

133,675,818 
142,205.900 

34.413.531 
S.S13,332 

52.352,407 

21,083,9^;. 

43,438,431 

07,052,445 

31,300,980 

272,272,653 

84,813,629 


Interest 
paid 


892,629,14.1 


53,383,912 


■  138,900.885 
018.424,858 


50,809,318 
347.275.631 


48,575..54n 
196.103 


Total 317.579  86,464,281.312  50.455,878,152  2,225,543.259  2,632.840,868    827.882.488 


$21,588,942 
07.010.715 

106,856.990 
09,942.988 
20..555.000 
17,300.022 
35,063.129 
12,180,155 
8,875.311 

44.721.079 

14.808.449 

174.539,551 

33,099,055 


Domestic 
tax 


539.214,995 


14,316,342 


'  47S,794.461 
599,615.687 


18,979,185 
817.548.352 


75.233,818 
538,371 


$11,605,060 
50,610,967 

105,712,538 
30.929,710 
6,373,911 
5,059,957 
20,980,571 
9.277,321 
4,869,458 

23,135,176 

4.798,166 

84.152.534 

16.902,796 


312.198.138 


5.410.319 


1  94.969,112 
115..303.602 


17.297,918 
187,411,435 


32,848,878 
220,993 


•  Gross  income  and  total  deductions  incomplete 


STATISTICAL  APPENDIX  519 

Distribution  of  Corporation  Incomk  hy  Inuu.stuial  Croups  anu  by  Nature 
OF  Deduction,  Calendar  Ykar  IdlS—CotUinual 


Industrial 
groups 


Agriculture 
and     related 
industries. . . 
Mining      and 
quarrying. . 
Manufactur- 
ing: 
Food  prod- 
ucts, liquors 
and  tobacco 
Textile  and 
textile 
products 
Leather and 
leather 
products. . 
Rubber  and 
rubber 
goods . 
Lumber  and 
wood  prod- 
ucts  

Paper  and 
pulp  prod- 
ucts  

Printing  and 
publishing 
Cliemicals 
and   allied 
substances 
Stone,  clay, 
and     glass 
products. . 
Metal    and 
metal 
products. . 
A  1 1     other 
manufact- 
tuiing    in- 
dustries.. . 

Total  Man- 
facturing 

Construction 

Transporta- 
tation  and 
other  public 
utilities. . . . 

Trade 

Public  service 
— profes- 
sional a- 
musements, 
hotels,  etc.. 

Finance,bank- 
ing,  insur- 
ance, etc. . . 

Combinations 
— predomi- 
nant indus- 
try not  as- 
certainable. 

Inactive  con- 
cerns  


Exhaus- 
tion, amor- 
tization, and 
depletion 


$17,583,142 
442,0S0,77i 

177,917,440 

119,768,730 

11,180,989 

25,893,669 

75,465,694 

35,464,962 
21,671,620 

162,604,867 

29,487,788 

526,605,.394 

85,654,39; 


1,271,715,750 


Total. 


41,365,546 


'  176,598,869 
202,557,766 


37,588,270 
107,461,984 


118,367,048 
137.501 


Miscella- 
neous ex- 
pense 


S159,703,14.i 
1.079,321,072 

1.052,179,524 

561,995,563 

142.479,807 

147,065,338 

280,076,668 

112,3-17,244 
400,708,189 

490,754.195 

115,169,700 

1,441,.394,599 

409,746,296 


5,153,887,123 


2.415.465,648 


497.953.438 


'1,781,515,693 
1,9S6,7()1,432 


593,401.541 
2,326,813,932 


652,696,253 

2,878,382 


14,234,932,009 


Total 
deductions 


S493,833,7o6 
3,49.S,73S,914 

8,927,180,978 

6,001,895,180 

1,612,474,006 

949,581,584 

1,841,851,952 

917,480,176 
916,919,872 

3,698,095,824 

614,681,075 

11,348,920,706 

2,803,950,469 


39,633,031.822 


1.828.051,521 


■  3.042,496,500 
20,660,162,736 


1,052,888,163 
5,411,076,132 


3,167,125,605 
5,137,295 


78,792,542,424 


Net  income 
hefore  de- 
ducting tax 


S:!0, 346,97s 
496.,304,OS0 

498,479,706 

757,553,849 

113,633,150 

99,780,733 

157,165,677 

92,715,016 
56,096,352 

379,542,366 

75,309.488 

2,009.071,487 

294,771,91; 


Income  tax. 
war  profits, 
and  excess 
profits  tax 


4..534, 119.736 


118,248.607 


679,499,312 
1.001,581,293 


45,039,744 
478,685,620 


290,687,996 
»  2,774.478 


7.671. 738.888 


.?12,741,714 
191,364,377 

206,753,592 

393,449,61 

41,529,905 

38,341,162 

55,673,488 

36,335,014 
17,397,647 

160,607,194 

32,056,360 

1,003,031,267 

126,869,566 


2,112,044,810 


149,353.753 
369,901, 3(i() 


14,941,922 
120,087,200 


116,369,828 


3,158,764,422 


Net  in- 
come after 
deducting 
tax 


SI  7, 60."), 26  4 
301,9;$9,703 

291,726,114 

364,104.234 

72.103.245 

61.439.571 

101,492,189 

56,380,002 
38,698,705 

218,935,172 

43,253.128 

1,006,040,220 

167,902.346 


2,422,074,920 


46,289,149 


5.30,145,5.'>9 
631,679.933 


30,097,822 
358,598,420 


174.318.168 
'  2,774.478 


4,512,974,466 


'  Gross  income  and  total  deductions  incomplete  '  Deficit 


520 


PROBLEMS  IN  BUSINESS  FINANCE 


XVI.    CoKPORATioN  Income  and  Deductions  by  Indistuial 

Groups,  Showing  Amounts  Expressed  in  Percentages, 

Calendar  Year  1918 


Industrial  groups 


Agiiculture    and      related 

industries 

Mining  and  quarrying . 
Manutacturing: 

Food   products,  liquors, 

and   tobacco 

Textile  and  textile  prod- 
ucts   

Leather  and  leatherprod 

ucts 

Rubber  and  rubber good 
Lumber  and  wood  prod- 
ucts   

Paper,    pulp,  and  prod- 
ucts   

Printing  and  publishing 
Chemicals     and     allied 

substances 

,*tone,    clay,    and    glass 

products 

Metal  and  metal  prod- 
ucts   

All  other  manufacturing 

industries 

Totsl  manufacturing 

Construction 

Transportation  and  other 

public  utilities 

Trade 

Public  service— profes 
sional,   amusements 

hotels,  etc 

Finance,    banking,    insur 

ance,  etc 

Combinations — predomin- 
ant industry  not  ascer- 
tainable  

Inactive  concerns 


Total, 


P.ct. 


100,00 
100,00 


100,00 

100,00 

100.00 
100.00 

100.00 

100.00 
100.00 

100.00 

100,00 

100.00 

100.00 
100.00 
100.00 

(') 

100.00 

100.00 
100.00 


100.00 
100.00 


p.ct. 


50.98 
15.22 


77,90 

75.11 

80.95 
71.03 

68.89 

71.92 
44.90 

71.33 

60.74 

G6,24 

70,13 
71,23 
62.46 

(') 
79.11 

29.95 
27.59 


64,76 
49.09 


P.ct. 


3.08 
1.33 


1.42 
2,10 


1.99 

.84 


2.15 
4,47 

1.66 

4,53 

2,04 

2,73 
2.02 
2.74 

(■) 
2.85 

5.17 
5.90 


1.40 
8.30 


2.57 


P.ct. 


4.12 

1.68 


1.13 

1,03 

1.19 
1,66 

1.7S 

1,21 
.91 

1.10 

2,14 

1,30 

1.09 

1  22 

^74 

(■) 
2.77 

1.74 

13.  S8 


2.1 
22 .  78 


2.21 
1.26 


1.12 
.46 

.37 

.48 

1.05 

.92 
.50 

,57 

.70 

.63 

.55 
.71 
.28 

(') 
.53 

1.57 
3.18 


95 
9.60 


.96 


c-c 
o  c 


P.cl.     P.  ct. 


3.35 
11.07 


1.89 

1.78 

.65 
2,47 

3.78 

3,51 
2,23 

3,99 

4.28 

3.95 

2.77 
2.88 
2.13 

(') 


3.42 
1.82 


3.42 

5.82 


30.47 
27.02 


11.16 

8.32 

8.26 
14.02 

14.02 

11.11 
41.19 

12.03 

10.69 

10.80 

13.22 
11.67 
25.58 

(') 

9.i: 

54.05 
39.51 


18.88 
121.81 


2.79    16.48    91,12 


P.  ct. 


94.21 

87.58 


94.71 

88,80 

93.14 
90.50 

92.14 

90.82 
94.26 

90.68 

89.08 

84.96 

90.49 
89.73 
93.93 

0) 
95.36 

95.90 
91.88 


91.59 
217.40 


|2 
o  tic 


P.  ct. 


5.79 
12.42 


5.29 

11.20 

6 .  59 
9.50 

7.86 

9.18 
5.74 

9.32 

10.92 

15.04 

9.51 

10.27 

6.07 

(0 

4.64 

4.10 
8.12 


8.41 
2117.40 


e-B 


p.ct. 


2.43 
4.79 


2.19 

5.82 

2.41 
3.65 

2.78 

3.60 
1,78 

3,94 

4.65 

7.50 

4.09 
4.78 
3.70 

(') 
1.71 

1.36 
2.04 

3.37 


P.ct. 


3  36 
7.63 


3.10 
5.38 


4.18 
5.85 


5.58 
3.96 

5.38 

6.27 

7.54 

5.42 
5.49 
2.37 

(') 
2.93 

2.74 
6.08 


5.04 
U17.40 


5  23 


'  Not  given,  due  to  iacomplete  data. 


STATISTICAL  APPENDIX 


521 


XVII.     Corporation  Returns  Distributed  ky  Income 
Classes,  Calendar  Year  1918 


Per  cent 

War  profits 

Average 

of  total 

Income  classes 

Num- 

Xct income 

Income 

and  excess 

Tota)  tax 

amount 

tax  to 

ber 

tax 

profits  tax 

of  tax 

net 

mcome 

Reporting     net     m- 

come : 

0  to  $2,000 

68,97.3 
49,397 

$    55,281,461 

S2,000  to  $5,000. . 

162,073,156 

$  7,275,952 

$      2,504,236 

$      9,780,188 

$         198 

6.03 

S5,000  to  $10,000 

29,780 

213,305,243 

16,441,379 

12,069,321 

28,510,700 

957 

13.37 

$10,000toS50,000 

37,053 

800,570,917 

70,090,289 

133,925,606 

204,015,955 

5.506 

25.48 

$50,000  to 

$100,000 

7,224 

507,215,825 

41,567,639 

138,743,794 

180,311,433 

24.960 

35.55 

$100,000  to 

$250,000 

5,383 

838,508,564 

66,636,178 

262,601,787 

329,237,9()5 

61.163 

39.26 

$250,000  to 

$500,000 

2,054 

713,779,767 

54,454,610 

247,027,672 

301,482,282 

146,778 

42.24 

$.500,000  to 

$1,000,000 

1,171 

815,090,903 

61,947,717 

286,745,920 

.348,693,637 

297.774 

42.78 

$1,000,000  to 

$5,000,000 

846 

1,701,416,343 

131,803,287 

574,088,712 

705,891,999 

8.34,388 

41.48 

$5,000,000  and 

over 

180 

2,.554,269,070 

202,981,432 

847,858,831 

1,050,,H40,263 

5,8.38,001 

41.14 

Total 

202,061 

S,.361, 51 1,219 

653,198,483 

2,055,565,939 

3,158,764,422 

2  23,734 

!  38.03 

Reporting  no  net  in- 

115,518 

1  689.772..361 

317,579 

7  671  738  888 

flAf!  1  Q»  dHA 

2,505,565,930 

3,1.58,704,422 

'Deficit 

•i 

.\verage  for  r( 

Hurns  repor 

ing  net  incnni 

e  of  $2,000  an 

d  over 

522  PROBLEMS  IN  Bl'SINESS  FINANCE 

XVIII.  The  Hkcohd  or  Bisinkss  Faih  hks  ix  thk  I'nited  States 

It  may  be  of  considerable  use  to  the  reader  to  have  before  him 
general  statistics  of  liusiness  failures  over  a  period  of  years.  The 
followino;  tables,  therefore,  based  on  Dim's  and  Bradstreet's  annual 
reports  are  here  given: 

A.     I'AJLURKS,  Assets,  Liabilities  and  Number  in  Business  in 
THE  I'mteo  States  "Nearly  Since  1<SS1.   (Bradstioet's) 


No. 

Per  cent 

Actual 

Total 

Per  cent 

1 
Xmnbcr 
in  busine.s.s 

P.ct. 

Year 

i  norcase  or 

assets. 

liabilities 

assets   to 

fail- 

failuros 

decrease 

millions 

millions 

liabilities 

ing 

1920 

8.463 

+53.4 

.5274.1 

S426.3 

64  3 

1,958,042     i 

43 

1919 

.5,515 

-40.8 

55.3 

115.5 

47.9 

1,843,066 

29 

1918 

9,331 

-28.3 

69.3 

137.9 

.50.9 

1,824,104 

51 

1917 

13,029 

-21.0 

84.8 

166.6 

50.9 

1,828,464     1 

71 

1916 

16,496     1 

-13.3 

86.1 

175  2 

49.1 

1,790,776     ' 

92 

1915 

19,035     [ 

+  13.4 

160.8 

284 . 1 

.56.5 

1,770,914     , 

1.07 

1914 

16,769 

+  15.2 

197.2 

357 . 1 

55.2 

1,749,101     , 

.95 

1913 

14,551 

+5.3 

159.0 

292.3 

.54.3 

1,718,345 

.84 

1912 

13,812 

+9.2 

98.5 

198.9 

49.5 

1,673,452     ' 

.82 

1911 

12,646 

+9.2 

102.0 

188.1 

.54.2 

1,637,650 

.77 

1910 

11,573 

-2.3 

94.2 

188.7 

49.8 

1,592,509 

.72 

1909 

11,845 

-15.6 

69 . 3 

140.7 

49.2 

1,543,444 

76 

190S 

14,044 

+36.8 

168.4 

295 . 9 

56.9 

1,487,813     ' 

94 

1907 

10,265 

+9.3 

287 . 9 

383.7 

75.0 

1,447,680 

70 

1906 

9,385 

-5.9 

63.1 

127.2 

50.0 

1,401,085 

.66 

1905 

9,967 

-4.3 

65.0 

121.8 

53.3 

1,352,947 

.73 

1904 

10,417 

+6.5 

75.7 

143  6 

52.7 

1,307,746 

.79 

1903 

9,775 

-1.9 

84.1 

154.3 

54 . 5 

1,272,909 

.76 

1902 

9,973 

-6.3 

50.4 

105.5 

47.7 

1,238,973 

.80 

1901 

10,648 

+7.4 

61.1 

130.1 

46.9 

1,201,862 

.88 

1900 

9,912 

+2.8 

60.1 

127.2 

47.2 

1,161,639 

.85 

1899 

9,642 

-16.9 

60.1 

119.8 

50.1 

1,125,873 

.85 

1898 

11,615 

-11.2 

73.1 

141.6 

51.6 

1,093,373 

1  06 

1897 

13,083 

-13.3 

86.5 

158.7 

54.5 

1,086,0.56 

1.20 

1896 

15,094 

+  16.4 

147.8 

246.9 

59.9 

1.079,070 

1.40 

1895 

12,958 

+  1.8 

87.6 

158.7 

55.2 

1,053,633 

1.23 

1894 

12,724 

-17.9 

83.2 

151 . 5 

54.9 

1,047,974 

1.21 

1893 

15,508 

+51.0 

231.5 

382.1 

60.6 

1,059,014 

1   46 

1892 

10,270 

-17.1 

54.7 

108.6 

50.3 

1,035,564 

99 

1891 

12,. 394 

+  16.1 

102.9 

193.1 

53.3 

1.018,021 

1.21 

1890 

10,673 

-9.0 

92.7 

175.0 

52.9 

989,420 

1.07 

1889 

11,719 

+  10.7 

70.5 

140.7 

50.0 

978,000 

1.20 

1888 

10,587 

+9.7 

61.9 

120.2 

52.0 

955,000 

1   10 

1887 

9,740 

-7.8 

64.6  • 

130.6 

50.0 

933,000 

1.04 

1886 

10,568 

-4.9 

55.8 

113  6 

49.0 

920,000 

1   15 

1885 

11,116 

-4.3 

55.2 

119.1 

46.0 

890,000 

1.25 

1884 

11,620 

+  13.0 

134.6 

248.7 

54.0 

875,000 

1  32 

1883 

10,299 

+34.0 

90.8 

175.9 

52.0 

855,000 

1.20 

1882 

7,635 

+28.0 

47.4 

93.2 

51.0 

820,000 

93 

1881 

i       5,929 

35.9 

76.0 

47.0 

780,000 

.76 

STATISTICAL  APPENDIX 


523 


t- 

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^ 

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03 

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-t'co' 

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STATISTICAL  APPENDIX 


525 


D.  Causes  of  Failures  in  the  United  States  (Bradst reefs) 


Failures  due  to 

N  umber 

Assets 

Liabilities 

1920 

1919 

1920 

1919 

1920 

1919 

Incompetence 

2,753 

2,109 

$32,455,312 

$11,730,114 

$56,522,786 

$26,068,530 

Inexperience 

556 

307 

7,725,694 

1,740,312 

14,268,745 

5,510,902 

Lack  of  capital 

2,735 

1,669 

60,395,251 

15,837,726 

113,612,638 

29,378,542 

Unwise  credits 

131 

72 

12,625,729 

2,869,310 

15,578,242 

4,534,615 

Failures  of  others .  .  . 

105 

97 

2,389,931 

2,046,947 

3,476,379 

3,844,066 

Extravagance 

105 

59 

642,160 

612,889 

1,268,384 

1,374,864 

110 

93 

1,057,127 

340,426 

476,852 

2,021,429 

934,622 
945,009 

Competition 

112 

59 

728,628 

1,266,060 

Specific  conditions.  . 

1,221 

623 

144,002,263 

12,095,267 

194,121,666 

23,671,566 

Speculation 

43 

37 

4,761,745 

1,112,845 

8,119,845 

2,640,534 

Fraud  

592 

390 

7,363,014 

6,498,608 

16,115,341 

16,646.409 

Total 

S,463 

5,515 

$274,147,854 

$55,361,296 

$126,371,515 

$115,549,659 

Return  to  desk  from  Which  borrowed. 


This  book  is  DUE  on 


the  last  date  stamped  below. 


MAY  10  1948 

AUG  07  199^ 

AUT0DISCCiRCAU&04'94 


LD21 


_100m-9,'47(A5702sl6)47e 


II  II  III  llllllll  II 

CDM77filS7fl 


YD 


059// 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


'••«      » 


